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Has the slowdown bottomed out?
Fri, 12 Oct Pre-Open

Maybe the pain is not as bad as that of the Greek and Spanish economies, but there is no denying that India is suffering its own economic crisis. The Indian economy slowed to 5.5% in the April-June quarter. Even during the height of the global financial crisis, India's economy managed to grow at a faster clip. The growth at that time had slowed to 5.6% (as reported in the October-December 2008 quarter). In FY12 as whole the economy grew by 6.5%, the slowest pace of annual growth since FY03.

India's economic slowdown has mainly been driven by deterioration in investment, the causes of which have been well documented. They include the abject failure of Manmohan Singh's administration to implement much-needed reforms to improve the investment environment; the determination of the Reserve Bank of India (RBI) to maintain a tight policy stance to contain inflation; the deterioration in the government's fiscal position, the widening current account deficit that has contributed to the sharp depreciation in the rupee and sluggish external demand that has weakened India's external sector.

In order to arrest the slowdown in the Indian economy, the Government has unleashed a series of economic reforms. This move has helped in improving market conditions and increase investor confidence. Forecasts by independent economists suggest that the slowdown in India's growth may have bottomed out. HDFC Bank has upped its forecast for the next fiscal year while others are expected to follow suit soon.

The upward revisions were mainly due to expectations of greater overseas capital inflow. At the same time the current policies are expected to in the fiscal deficit as well. The exuberance was visible in the buoyant market sentiments after the government opened up the insurance, retail and aviation sectors for foreign direct investment (FDI) and took the politically-sensitive decision of raising diesel prices. However the economists have also indicated that though there may not be any visible improvement on the ground, the outlook for next few quarters may have improved. But the key thing here is whether the policy changes actually go through or not. We need to keep in mind that most of these need legislative action which needs political support. And if the support falls through so will the policy reforms.

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