Economic activity is expected to recover gradually as the rupee depreciation supports exports, infrastructure projects cleared by the Cabinet Committee on Investment come on stream and political uncertainty declines after the general election due in the spring 2014. However, the rupee depreciation is putting pressures on inflation and the public finances, as well as on corporates and banks with high external debt exposure. Supply constraints will continue to restrain growth, adding to inflationary pressures and the current account deficit.
The new monetary policy framework, which puts more weight on inflation as a policy anchor, is welcome. However, containing inflation pressures also requires reducing the fiscal deficit and dealing with supply constraints that limit growth. The new Land Acquisition Law may promote investment, but the new Food Act will be fiscally costly. Priority should now be given to cutting energy subsidies, better targeting household transfers, implementing pending tax reforms, improving infrastructure and reforming the labour market.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.