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A Pre-Budget Overview of the Indian Economy – A Special Feature

India, often considered as one of the fastest growing economies in the world, has witnessed its economic growth plummet in the last two years. India's economy grew 4.9 percent in 2013–14 after slipping to 4.5 percent in 2012–13 and the 5.5 percent GDP growth predicted for 2014–15 appears difficult with the economy showing no signs of recovery in the first quarter of 2014. India's manufacturing sector experienced contraction towards the end of 2013 and the trend continued in the first quarter of 2014, with the IIP or Index of Industrial Production, which details out the growth of various sectors in the Indian economy such as mining, electricity and manufacturing, contracting 1.8 percent in February and 0.5 percent in March 2014. March also saw a rise in inflation measured with the Consumer Price Index (CPI) at 8.31 percent. India's merchandise exports also contracted 3.15 percent to USD 29.6 billion.

April 2014 saw the first economic good news of the year with a 5.26 percent rise in exports followed by an increase in factory output with a 3.4 percent rise in IIP and a subsequent easing in inflation with the CPI slowing to 8.28 percent in May 2014. The formation of a new stable government in India led by Prime Minister Narendra Modi in May 2014 raised hopes of an upturn; several decisions and policies of the business friendly Modi government seem set to improve India's economic prospects, especially in the vital manufacturing sector. However, the Modi-led government that has vowed to focus on development has a formidable task ahead for its first budget session to revive the stuttering economy.

According to a World Bank report released in April, India is the world's third biggest economy in terms of purchasing power parity (PPP), indicating that prices in India are still well below those in advanced economies. The country has been consistently rated among the world's top three investment destinations by the World Bank, supported by its liberal foreign investment policies. India's per capita income is projected to soar by 10.4 percent to Rs. 74,920 in 2013–14 as the country's economy approaches the USD 1.7 trillion mark. The International Monetary Fund (IMF) has projected a growth rate of 6.4 percent next year, in line with the gradual strengthening of global markets, while the World Bank has projected an economic growth rate of 5.7 percent for India. Leading economists predict an economic growth of 6.5 to 7 percent in 2015–16 on expectations of an investment-led economic turnaround in the country.

The total automobile market size in India is likely to triple from the present 1.7 million units to 9.3 million units by 2020. Driven by enhanced demand as the number of people with disposable income increases, the sector will grow at a compounded annual growth rate (CAGR) of 16 percent during the period. The telecom sector is also forecast to gain with the number of telecom subscribers in India projected to grow from the current level of 898 million to 1.2 billion by 2016. Organized retail in India is estimated to grow more than 5 times from current level of USD 27 billion to USD 150 billion by 2020.

India's economic growth has been for decades hampered by its flawed economic policy. Economic empowerment needs the creation of new jobs in manufacturing and the modernization of agriculture. Micro, small and medium businesses contribute nearly 8 percent of India's gross domestic product (GDP), 45 percent of the manufacturing output and 40 percent of exports. Elevated inflation, a tight monetary stance and a weak currency will continue to constrain spending. Further, fiscal austerity is likely to be an additional drag on growth. Economic recovery will have to be led by improved investment and consumption. The opening up of foreign direct investment (FDI) in several sectors by the Modi-led government seems to be the right step in this direction. Modi also said recently that there is a need to administer "bitter medicine" to revive the ailing economy. Many structural reforms are expected in the finance sector, resulting in a stronger business sentiment, which can be thanked for the significant uptrend in the manufacturing and services sectors in June 2014. The HSBC Services Purchasing Managers' Index rose to a 17-month high of 54.4 in June from 50.2 in May. The HSBC India Composite Output Index, which covers both services and manufacturing, rose to a 16-month high of 53.8 in June from 50.7 in May. The growth momentum is expected to continue with faster reforms expected thanks to the political stability. However, although Modi may have laid the groundwork of positive economic growth for decades to come, the process could take longer than desired due to the nature of India's political system.

In addition to facing the challenges of high inflation, high interest rates, weak manufacturing growth and poor infrastructure, India is also faced with the prospect of a weak monsoon. A favorable monsoon would have helped the agriculture sector grow at close to its trend rate of 3 percent. However, initial estimates of a rainfall of 7 percent below normal spell doom for India's agricultural sector, which could post a 0 percent or negative growth if the rainfall during the June to September monsoon is 10 to 15 percent below normal. A poor monsoon could also result in a 1–2 percent spike in the CPI.

Meanwhile, prices of petroleum products are steadily rising owing to changes in the international scenario, particularly the Syria–Iraq crisis. The increased fuel prices, the rising inflation and the poor monsoon are major factors to be considered as the new Indian government prepares its first Union Budget for 2014–15. This year's budget is probably the most crucial in recent times and will decide the economic trends in the years to come. A capitalist-favoring budget is being anticipated with measures helping entrepreneurial pursuits grow at large. At the same time, perks for middle and small-scale businesses will also help empower the economy.

(The above passage is a part of "Polymer Prospects based on Global Economic Indicators," a POLYMERUPDATE Special Report)