GDP Preview: India's economy stuck in a rut


While India's charismatic central bank governor Raguhram Rajan may have turned around investor sentiment towards the country in recent months, Asia's third largest economy appears to be stuck in a rut when it comes to growth.

India's gross domestic product (GDP) data due out on Friday is expected to show the economy grew 4.9 percent during the October-December quarter, according to a poll by Reuters, largely in line with the 4.8 percent growth in the previous three months and well under its potential growth rate of 6.5-7 percent.

"Downside risks to the Indian economy have receded in recent months as inflation has trended lower and the external shortfall has narrowed. The economy is now much better placed to weather the U.S. Fed [Federal Reserve] tapering and other downside risks in 2014. But there is no sign of a lift in the real economy," said Glenn Levine, senior economist at Moody's Analytics.

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From manufacturing activity to consumer spending, key drivers of the domestic economy remained sluggish in the final three months of the year, say economists.

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"The domestic indicators aren't likely to look good - industrial production has fared poorly, the service sector has been slowing and discretionary spending has been burdened by high inflation and pressure on employment prospects," said Radhika Rao, economist at DBS.

The country's auto industry encapsulates weak consumer sentiment, with auto sales witnessing their first annual decline in over a decade in 2013.

Meanwhile, business investment is also expected to have remained weak on tepid demand, higher borrowing costs and political uncertainty with the general elections around the corner.

"Business confidence is low and the government budget is just about all gone. The May election offers the chance for better governance, especially if the business-friendly Narendra Modi becomes prime minister, but it will be a long road back for the Indian economy," said Levine.

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However, it hasn't been all gloom and doom for the Indian economy. The farm and export sectors have been relative bright spots in the recent months.

Agricultural output has been boosted by a robust monsoon, supporting consumer demand in rural India. Meanwhile, exports remained steady, helped by a weaker rupee and improved global demand.

And, economists say an overall improvement in growth will hinge on a continued improvement in exports in the near-term.

"Considering the constraints facing domestic demand, we believe that the strength of the overall growth improvement will depend largely on an improvement in exports in the near term and measures to boost productivity in the medium term," said Morgan Stanley economists wrote in a report.

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"A meaningful recovery in private capex, government spending or private consumption will be difficult to achieve over the next 6-12 months while policy makers focus on improving macro stability indicators, such as inflation, current account deficit, and improving the banking sector balance sheet," they added.

—By CNBC's Ansuya Harjani. Follow her on Twitter @Ansuya_H