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Slowdown in growth due to administrative obstacles: HSBC

Last Updated: Thursday, May 31, 2012 - 19:07

New Delhi: Global banking giant HSBC on Thursday termed India as a "gasping elephant" as the slowdown in economic growth is "deepening" and the downside risks to the outlook have increased.

In a research note, HSBC said the slowdown in growth has proven deeper than expected and blamed administrative obstacles and policy paralysis for the same.

India's economic growth rate slowed to a nine-year low, in March quarter at 5.3 percent and 6.5 percent for 2011-12.

The decline in growth was witnessed in almost all segments of the economy, including agriculture, manufacturing, mining and construction.

At 6.5 percent, the GDP growth in 2011-12 has been at a lower level than during the crisis period growth of 6.7 percent.

"Administrative obstacles have held back key investment projects and the much talked about policy paralysis has significantly hurt investor sentiments and added to the negative external spill overs trough the finance channel," it said.

Going ahead, the downside risks to the economy have increased as policy paralysis in the country is not likely to ease anytime soon.

"With policy paralysis not likely to ease any time soon, however, India may have to settle for sub-par growth and elevated inflation over the next couple of years," the HSBC report said.

Slowdown in investments has significantly lowered the growth potential of the economy and to boost growth over the medium term, India needs deep supply side reforms but with the given administrative bottlenecks.

"To lift growth more notably, going ahead India needs more traction on deep supply side reforms, which will lift potential growth over the medium term. This will also help lift growth in the short term by improving sentiments and, thereby, the private investment cycle," HSBC said.

The weaker than expected GDP growth numbers are likely to increase pressure on the Reserve Bank to cut policy rates further. However, the lingering inflation pressures suggest that monetary policy cannot be eased aggressively.

"... Traction on deep rooted structural reforms is needed to significantly improve the inflation-growth trade-off in the short as well as medium term," HSBC Chief Economist for India & ASEAN Leif Lybecker Eskesen said, adding that the RBI will have to approach any further easing with "caution".

The Reserve Bank is scheduled to announce its mid-quarter credit policy on June 18.


First Published: Thursday, May 31, 2012 - 19:07
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