India in a 'Horror Show' as Growth Slumps

Indranil Mukherjee | AFP | Getty Images

India's growth estimates for the fiscal year ending March 31 came as a shock to many who were hoping for a turnaround in Asia's third largest economy, with one expert calling the likely 5 percent annual expansion a "horror," as it is the slowest in over a decade.

"A lot of U.S. hedge funds were shorting China, and China still came in with 7.5 percent growth, now we see India is much worse than expected – 5 percent – that's a horror show," Uwe Papart, head of research at Reorient Financial Markets told CNBC's "Capital Connection."

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India's economy grew 5.4 percent in first half of the fiscal year, from April to September, implying a deeper slump over the October to March period. Growth in the quarter ending in December likely decelerated to 4.8 percent as a result of deep cuts in government spending, Reuters reported, citing a senior official at the statistics ministry.

The government's full year forecast came in well below that of the central bank, which had predicted growth of 5.5 percent.

According to Papart, there is little scope for revival in growth, given the government's limited means to stimulate the economy due to its mounting budget deficit. Over April to November, the central government's fiscal deficit touched 80.4 percent of the budget estimate.

He added, "It's going to be very difficult for the central bank to walk that tight rope between not killing growth altogether and inflation… if they cut rates at this point it will create a real mess there's no question about it." The Reserve Bank of India (RBI) lowered interest rates by 25 basis points to 7.75 percent in January - its first cut in nine months.

Can India Stage a Comeback?

Some India watchers, however, believe the economy is positioned for a pick-up in growth in the coming fiscal year beginning April 2013, helped by a rise in investment and exports.

Growth is expected to accelerate between 6.5-6.9 percent– the fastest pace in two years – according to some economist estimates. The economy expanded 6.2 percent in fiscal year 2011-2012.

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"With emerging positive outlook in the U.S. and China, and the EU area economies likely to bottom out toward the middle of this year, it appears that India will find a more favorable demand environment in 2013," said Taimur Baig, chief India economist at Deutsche Bank, noting that a weaker rupee will also support the country's exports – which account for over 20 percent of gross domestic product (GDP).

Baig foresees an improvement in investment, helped by the RBI's monetary easing, and a slew of foreign direct investment (FDI) reforms unveiled over the past five months in sectors ranging from aviation to retail.

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He added that the infrastructure and consumer sectors will be popular destinations for investment. In January, India's foreign investment board cleared IKEA's proposal to set up stores in the country.

Adding to this, Robert Prior-Wandesforde, head of India & Southeast Asia economics at Credit Suisse, noted that the positive wealth effect created by the rally in Indian equities – which have risen 12.5 percent over the past six months - could also emerge a positive driver for consumption in the country.

"This could be a feel good factor for the middle class, and it will have positive sentiment effects," he said.