P Chidambaram, India's finance minister
INDIA’S economic growth rate will shrink to below five per cent this year as the government struggles to restore investor confidence, the International Monetary Fund forecast on Tuesday (October 9).
A new raft of reforms should help the growth rate to bounce back in 2013, the IMF said in its latest World Economic Outlook survey.
But the organisation lowered its forecast for 2012 by one percentage point to 4.9 per cent, citing “an expectation that current drags on business sentiment and investment will persist”.
Although India recorded growth of 6.8 per cent in 2011, it has dipped more recently to around 5.5 per cent, its lowest in three years.
Investor confidence has been particularly undermined by a series of corruption scandals, retroactive tax measures and nationwide blackouts in the summer, which highlighted concerns about creaking infrastructure.
An impasse in parliament between the Congress-led coalition and the main opposition Bharatiya Janata Party (BJP) meant that the government’s legislative programme hit the buffers before it broke up for a recess last month.
“Growth weakened more than expected in the first half of 2012, an outcome of stalled investment caused by governance issues and red tape, and a deterioration in business sentiment,” said the report.
The decline in confidence had also been fuelled by a rising current account deficit, forecasting that the 2012 deficit would be equivalent to 3.8 per cent of gross domestic product before dropping to 3.3 per cent in 2013.
However the report did say that the government could expect to see growth pick up pace in 2013, albeit a long way short of government expectations.
The government has recently unveiled a series of reforms designed to improve confidence, including allowing supermarket giants such as Walmart to set up shop and plans to open up the insurance and pensions sectors to foreign investors.
“Improvements in external conditions and confidence - helped by a variety of reforms announced very recently - are projected to raise real GDP growth to about six per cent in 2013,” said the report.
Speaking in New Delhi on Monday, Finance Minister P Chidambaram said it was “imperative” that the government cut its budget deficit and forecast that growth would pick up from the 5.5 per cent registered in the last quarter.
“There is no reason growth should stagnate at 5.5 per cent in all four quarters,” he said as he predicted a rise in investment.
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