Why Things Will Get 'Easier' for India's Economy Next Year

Crowd by harbor in Uttar Pradesh, India at dawn
Jami Tarris | Workbook Stock | Getty Images
Crowd by harbor in Uttar Pradesh, India at dawn

After a challenging year marked by slowing growth, speeding inflation, a major power blackout and the threat of a credit ratings downgrade to "junk," India can look forward to an "easier 2013," say economists at Deutsche Bank.

On Wednesday, India delivered a boost to investor sentiment when its lower house of parliament voted in favor of allowing foreign retailers such as Wal-Mart to open up shop in the country. On Friday the upper house of parliament also endorsed the vote.

Last year the coalition government led by Prime Minister Manmohan Singh was forced to back down on its decision to let foreign supermarket chains enter the country amid pressure from opposition parties who said the measure would force small stores out of business and lead to job losses. This U-turn had eroded investor confidence that India was serious about attracting investment

But the latest positive vote has raised hopes that India will continue a reform agenda started in September when it allowed foreign participation in retail, aviation and broadcast together with some fiscal tightening measures such as reducing fuel subsidies.

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"While the economy remains vulnerable to external shocks and domestic political turbulence, incentives are in place for the authorities to respond with investment friendly reforms, a dynamic already underway," wrote Deutsche Bank economists Taimur Baig and Kaushik Das in a note published Thursday.

They added that economic growth, which has slowed to around 5.5 percent this year, has bottomed and further policy initiatives would make for a "durable economic recovery," going forward.

"The economy will likely see a pick-up in external demand next year, and exporters would also be supported by a considerably weaker exchange rate. The Reserve Bank of India (RBI) is likely to cut rates next year, which should also help. And finally, we see consumption remaining resilient, helping anchor demand," the economists wrote.

The Indian rupee has seen a steep fall over the past one year and hovering around 54 against the U.S. dollar, a level viewed as competitive for boosting exports. Also the central bank, which has this year focused on reigning in inflation stubbornly above 7 percent, is also widely expected to cut interest rates next year. Both these factors will help boost the economy, said experts.

According to an estimate by Credit Suisse, the RBI is likely to cut interest rates by 125 basis points next year. This would be enough to push India's growth rate above 7 percent in late-2013, says Credit Suisse's head of India and Southeast Asia Economics, Robert Prior Wandesforde.

(Read More: Why India Struggles to Deliver Its Growth Potential)

While returning to the days of 8 percent-plus growth may still be a way off, India is likely to "face less pressure in 2013 and get more breathing space," according to the Deutsche Bank report. They forecast the Indian economy to recover to 6.5 percent gross domestic product growth in fiscal year 2013/2014.