Is the Worst Over for India’s Economy?

Gross domestic product (GDP) growth in India picked up pace in the April-June quarter helped by a rise in construction output, prompting economists to say the worst might just be over for Asia’s third largest economy struggling to return to the days of 8-9 percent growth rates.

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The economy expanded 5.5 percent in the second quarter, beating consensus estimates and marking an improvement from the previous three months when growth came in at 5.3 percent - the slowest pace in nine years.

Economists expect India to better that in the coming months as commodity prices decline and a weak, but stable rupee makes its exports more competitive.

“The worst is probably over for India – we may be at, or close to the bottom,” Robert Prior-Wandesforde, Director of Asian Economics at Credit Suisse in Singapore told CNBC.

“The economy is losing some of the negatives that were hampering it before – oil prices are at a more manageable level, the lagged effects of the interest rate rises in 2010-2011 are fading,” he said, adding that he expects growth to move towards the trend rate of 7 percent in coming quarters.

The Reserve Bank of India forecasts growth will come in at 6.5 percent for the current fiscal year, while the government’s target is 6.7 percent.

Weaker oil prices – which have declined more than 10 percent over the last six months - help to contain India’s current account deficit as the country imports 70 percent of its crude requirements. Higher imports of oil and gold led the country’s current account deficitto widen to a record high of 4.5 percent of GDP in the January-March period.

In addition, Aninda Mitra, Head of Economics, Southeast Asia at ANZ, says the economy could see additional support from its export sector, which accounts for over 20 percent of GDP, thanks to the relative competitiveness of the rupee. The currency has weakened 5 percent against the U.S. dollar since the start of the year.

Vishnu Varathan, Market Economist, Mizuho Corporate Bank, says that while weakness in the rupee could benefit services exports, he cautions that weak demand conditions, particularly in key trade partner Europe, could limit the export sector’s boost to the economy.

Varathan adds while he’s not expecting a “free fall” in growth, he’s also not betting on a significant recovery in the coming months.

“In terms of how the third quarter is panning out, India has the bad monsoons to contend with and the manufacturing sector will continue to struggle,” Varathan said. India’s manufacturing output rose 0.2 percent year on year in the second quarter.

Leif Eskesen, Chief Economist for India & ASEAN at HSBC, who forecasts overall GDP of 6.2 percent for the fiscal year ending March 2013, expects a gradual recovery in growth from now onwards. But, he says this will hinge on the government’s progress on structural reforms – which have constrained the supply side of the economy.

India’s new Finance Minister P Chidambaram said earlier in August that bottlenecks to infrastructure projects will be removed for quicker implementation after India suffered its worst power outage in July that cut electricity supplies to half of its 1.2 billion people.

The central bank also called upon the government last week to fast track investment projects, which are necessary to attract foreign investment.

There has been mounting pressure on the government to reignite the economy via policy initiatives.

Chanda Kochhar, CEO of ICICI Bank toldCNBC earlier in the month that there is a sense of urgency among decision makers in the country. “I think there is a … clear desire to get decisions moving and I think (we) don’t actually need to wait until 2014 (when elections take place). If we get decisions… I think you will see a whole lot of sentiment changing.”