Country Report India May 2009

Outlook for 2009-10

• The results of the general election now under way will be announced on May 16th. The ruling Indian National Congress party appears more likely than the main opposition Bharatiya Janata Party (BJP) to head the next government.
• There is a strong possibility that the next coalition government will be even more fractured than the current one. It therefore appears unlikely that the next administration will complete a full five-year term.
• The Mumbai terrorist attack in November 2008 significantly heightened tensions between India and Pakistan, and normalising bilateral ties will be a difficult challenge for the next government.
• The outlook for the budget deficit is ominous: the Economist Intelligence Unit forecasts a central government budget deficit of 7.7% of GDP in fiscal year 2009/10 (April-March), after an estimated 6.8% shortfall in 2008/09.
• Real GDP growth is forecast to slow to 5% in 2009/10 in response to the global recession. The economic slowdown has not yet bottomed out, but GDP growth is forecast to accelerate to 6.4% in 2010/11.
• Consumer price inflation has not slowed significantly so far, and stood at 9.6% year on year in February. However, this will change during the remainder of this year, with inflation averaging 5% in 2009 and 4.3% in 2010.

Monthly review

• A national opinion poll published in early April projected that the Congress alliance would win 234 seats in the coming election and that the BJP alliance would secure 186, leaving both groupings short of a majority.
• The creation of alliances between regional parties to contest the general election means that most of Indias large regional and caste-based parties have not made pacts with the two big national parties, Congress and the BJP.
• At its quarterly policy meeting on April 21st, the Reserve Bank of India (the central bank) cut the repurchase (repo) rate by 25 basis points to 4.75%the sixth cut since September 2008.
• If re-elected, Congress is reported to be considering an economic stimulus package worth US$10bn, equivalent to 1% of annual GDP, to boost public investment and infrastructure projects.
• Although domestic demand, the mainstay of the economy, has held up well, the decline in exports accelerated in March, while industrial production fell year on year in February.
• Indias spectacular growth in savings and investment rates is set to moderate amid the economic downturn and deteriorating public finances.

Source: Country Report