India’s Economic Recovery Seen Subdued as Risks Persist

India’s economy probably expanded less than 5 percent for a second quarter as political gridlock that threatens Prime Minister Manmohan Singh’s growth agenda tempered gains from farm output and lower interest rates.

Gross domestic product rose 4.8 percent in January to March from a year earlier, compared with an almost four-year low of 4.5 percent in the previous quarter, the median of 21 estimates in a Bloomberg News survey shows before data due May 31. The annual average pace in the past decade is about 8 percent.

Graft scandals have roiled Singh’s coalition and disrupted parliament, hurting his efforts to extend an eighth-month policy push that seeks to revive investment. Bills to simplify taxes and liberalize the pensions and insurance industries have stalled, as a record current-account deficit and inflation risks limit the magnitude of monetary stimulus from the central bank.

“It’s going to be a very slow pick up in growth,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “External demand still remains weak and I don’t think there’s any revival so far in the investment cycle. At the margin, interest rates are being cut and the government is announcing some clearance in projects, but these things take time to have an effect.”

The S&P BSE Sensex index slid 1.9 percent yesterday as Asian stocks tumbled on disappointing Chinese manufacturing data and concern that the U.S. Federal Reserve may scale back bond purchases. The rupee depreciated 0.2 percent versus the dollar to 55.585, the weakest level since Nov. 26. The yield on the 8.15 percent government bond due June 2022 rose to 7.38 percent from 7.37 percent on May 22.

Farming, Rates

Farm output helped expansion last quarter, according to Yes Bank Ltd. and Bank of Baroda, as cooler weather and winter rains aided crops.

The Reserve Bank of India reduced interest rates in January, March and May by a combined 75 basis points to 7.25 percent as the government pared the budget deficit to tackle inflation. Governor Duvvuri Subbarao signaled after the May 3 cut that the nation has almost no space left to ease monetary policy further.

Wholesale prices rose 4.89 percent in April from a year earlier, a 41-month low, while the consumer-inflation index climbed 9.39 percent.

“Regaining the lost glory of 8 percent growth remains a tall order,” said Rupa Rege Nitsure, an economist at Bank of Baroda. “Inflation won’t come down if you don’t improve supplies and infrastructure. Interest rates won’t come down if inflation remains high.”

Global Slowdown

Central banks from Australia to South Korea and Europe have cut borrowing costs recently amid signs global growth is slowing.

Advisers to India’s Finance Ministry forecast GDP will advance 6.1 percent to 6.7 percent in 2013-2014, weathering risks. The statistics agency estimates last fiscal year’s expansion at 5 percent, a decade low. The latest assessment for 2012-2013 is also due May 31.

India’s estimated 4.8 percent growth last quarter leaves it trailing China’s 7.7 percent pace, 6.02 percent in Indonesia and 5.3 percent in Thailand. Singapore yesterday reported GDP rose an annualized 1.8 percent in the three months through March from the previous quarter.

Singh is grappling with renewed allegations that he has allowed corruption to fester after separate probes led to the dismissal of the law and railways ministers this month.

Parliament ended two days early in May as opposition parties demanding the men’s resignation blocked proceedings. Bills to open up the country’s pension and insurance industries to companies abroad are among those that are stalled.

The scandals threaten to undermine Singh’s efforts since September to spur expansion, lure capital inflows and avert a credit-rating downgrade ahead of an election due by May 2014.

Investment Caps

The steps included allowing more foreign investment in the retail and aviation industries, speeding up approvals for infrastructure projects and reducing a levy on overseas investors in local bonds.

Etihad Airways PJSC agreed in April to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($370 million), taking advantage of the liberalization.

Finance Minister Palaniappan Chidambaram has said proposals to remove or relax caps on foreign investment in other industries may be ready in June, as he strives to woo funds to finance the current-account deficit.

The shortfall swelled to $32.6 billion in the quarter ended Dec. 31, or 6.7 percent of GDP, stoked by gold and oil imports and subdued exports.

The imbalance is “by far the biggest risk” to the economy, according to the Reserve Bank, with Subbarao saying May 4 that any unwinding of “extraordinary quantitative easing” in advanced nations may affect capital flows to India.

“With the global recovery still expected to be sluggish, the pressure is on Indian policy makers to continue with reforms and address infrastructure bottlenecks and governance,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “It won’t happen overnight, it will take time.”

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