1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
May 11, 2014
India’s Economy Is On The Mend
Although not yet out of the woods, the Indian
economy is on the mend. The IMF expects the
Indian real GDP growth to recover to 5.4% this
year (4.4% in 2013, the lowest in 5 years),
bolstered by a rebound in agriculture and
stronger exports and government reforms.
However, lingering imbalances and structural
impediments are still holding back a full
recovery. The ongoing parliamentary elections
mark a cross-roads to the current program of
reforms needed to sustain stronger growth. Of
critical importance will be how the new
leadership will tackle the lack of infrastructure
investment and structural reforms whilst
attempting at the same time to keep the
current account and fiscal deficits in check.
Following robust annual average growth of
over 9.0% during 2004-07 spurred by a rapid
expansion of services and commerce, the
Indian economy suffered a slowdown with the
onset of the global financial crisis of 2008-09,
with real GDP growth falling to an average
6.2%. Growth did rebound initially between
2010-11 in response to large fiscal and
monetary stimulus but subsequently slowed
down markedly, reflecting weak global
demand and slow progress on key structural
reforms. Led by weaker corporate investment
growth with deteriorating asset quality
impacting the financial positions of banks and
corporates, the slowdown had ripple effects
throughout the economy between 2012-13.
The balance of payment pressures intensified
severely last summer. The announcement that
the US Federal Reserve would begin tapering
its quantitative easing program in May 2013
resulted in large capital outflows with
downward pressures on the currency and asset
prices. India was one of the main emerging
market countries affected due to its heavy
reliance on capital inflows to finance its large
current account deficit. The Indian Rupee
(INR) slumped to a record low of 68.4 against
the US Dollar (USD) in late August 2013 from
an average rate of 55.0 in the first half of 2013.
The large depreciation in the currency
occurred despite significant intervention to
support the currency as evidenced by the fall
in official foreign exchange reserves last
summer.
Indian Rupee and Foreign Exchange Reserves
(USD:INR and bn USD)
Sources: Bloomberg, Reserve Bank of India (RBI)
and QNB Group analysis
In response, liquidity conditions were
tightened, limits on foreign direct investment
and external borrowing were loosened and
restrictions on gold imports were imposed. The
centerpiece of policy actions was the
tightening of monetary policy since last July,
with the Reserve Bank of India (RBI) draining
liquidity from the banking system, limiting
260
265
270
275
280
285
290
295
300
305
310
40
45
50
55
60
65
70
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14USD:INR (Left Axis)
Foreign Exchange Reserves (bn USD) (Right Axis)

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
May 11, 2014
access to borrowing from its discount windows
and hiking short-term interest rates. In
addition, limits on foreign investments and
external commercial borrowing in foreign
currency were eased in order to allow more
capital inflows. Moreover, higher import duties
and quantitative restrictions on gold were
implemented to reduce the overall import bill.
As a result, the current account deficit has
narrowed, helped also by robust remittance
flows, and the INR has appreciated.
This strong domestic policy response has also
helped calm markets and bolster investor
sentiment. The parliament has passed the
Land Acquisition, Pension and Companies
Acts, which is expected to unleash previously
stalled public projects worth around 5% of
GDP. On the fiscal front, measures have been
implemented to raise diesel prices, shrink the
financial losses of the state electricity board
and to contain central government spending.
Going forward, against the background of
parliamentary elections due to be completed
by mid-May and prospective global liquidity
tightening, the new administration coming to
power will face a number of key economic
reform challenges. At the top of the agenda is
addressing infrastructure investment gaps and
supply-side constraints. In particular,
electricity shortages and an inadequate
transportation system need to be tackled in
the short term. Over the medium term, further
fiscal consolidation is needed, particularly tax
and subsidy reforms to lower fiscal
imbalances. In addition, more effective
education and health spending will be critical
to ensure that the demographic dividend pays
off over the long run. Finally, addressing
structural challenges in agriculture as well as
in the pricing and allocation of natural
resources will be essential to achieve faster
growth and higher job creation.
Overall, stronger global growth, improving
export competitiveness, measures already
underway to advance stalled infrastructure
projects and a confidence boost from recent
policy actions are likely to result in a moderate
growth recovery over the medium term.
However, further structural reforms in the
areas of electricity and transportation, fiscal
consolidation, education and health spending,
and the pricing of natural resources are needed
in order for India to achieve its full growth
potential.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
Ziad Daoud
Economist
Tel. (+974) 4453-4642
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend
on the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a
complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.