India: The year that was

India: The year that was

India: The year that was

Asia Pacific Economic Outlook, February 2014

In 2013, India’s economic outlook was negative due to sluggish growth and persistent high inflation. Significant political changes are creating uncertainty about the future.

India_coinThe year 2013 was marked by experiences that shook India’s core economic fundamentals, raising questions about its ability to sustain growth in the long run. The economic outlook turned negative due to sluggish growth and persistent high inflation. For the first time in a decade, India’s economic growth fell below 5 percent, growing 4.6 percent year over year in the first half of FY 2013–14 relative to the previous year.1 Inflation continued to remain high, close to or in double digits, due to the meteoric rise of food prices. In addition, India faced a rising fiscal deficit and an excessive imbalance in its current account, making the economy vulnerable to a number of risks. Political challenges in anticipation of the May 2014 general government election and policy inaction are creating further confusion and skepticism.

Global economic uncertainties aggravated India’s troubles: India was among the worst hit of those emerging economies whose currency, stock, and bond markets experienced extreme volatility this past summer due to the US Federal Reserve’s (Fed’s) tapering signal. The Indian rupee depreciated more than 20 percent, while stock markets fell 10 percent during May–September 2013 because of heavy capital outflows. The Reserve Bank of India’s (RBI’s) monetary tightening policy post the appointment of its new governor, along with the Fed’s decision to maintain quantitative easing in September 2013, helped bonds, stocks, and currencies in India restore their summer losses.

Impact on confidence

In the midst of the economic turmoil, consumer confidence and business sentiments were badly hit.2 According to an RBI survey, consumer confidence diminished in September, with around 60 percent of respondents expecting that economic conditions will worsen.3 The consumer confidence declined due to the worsening perception of household circumstances, income, spending, and employment. Meanwhile, the industrial outlook for the overall business situation is at its lowest level since 2005 due to the pessimistic assessment of and expectations for exports, imports, and the overall financial situation. The Business Expectation Index fell below the threshold level of 100 to 97.3 for the first time since 2008, indicating that businesses are highly pessimistic about the economic outlook and investment prospects.4

The outlook turned positive later

By the end of 2013, some good news started coming in. The growth in Q2 of FY 2013–14 improved slightly, to 4.8 percent, relative to the previous quarter’s low growth of 4.4 percent. This improvement was due to stronger growth in the agricultural and construction sectors. Growth in the industrial sector, which was sluggish mostly due to poor growth in the manufacturing, mining, and quarrying sectors, improved in October. Strong recovery in the manufacturing and mining sectors boosted the industrial production index.

The trade account deficit reduced due to proactive policy measures by the RBI and the government. Factors such as slowing domestic demand and lower oil prices due to reduced external risks also helped contain import bill growth. At the same time, exports grew faster in the first half of the current fiscal year relative to FY 2012–13 due to the currency depreciation and improved global demand.

The changing political landscape

The year ended with a marked shift in the political arena. The assembly elections in five states of India in December 2013 affirmed the widely felt dissatisfaction with the ruling government, the United Progressive Alliance (UPA) coalition, led by the Indian National Congress (the Congress). In four of the five states, the Congress, India’s “grand old party,” lost the elections. The biggest gainer was the Bharatiya Janata Party (BJP), the largest opposition party, which aims to ride the momentum of the big state wins through the national elections in 2014.

But what took the country by a storm was the stunning entry of the Aam Aadmi Party (the “Common Man Party,” or AAP) in the Delhi state assembly elections. Launched by anticorruption campaigners last year, the AAP defied expectations and came very close to winning half the seats in a state so far dominated by the Congress and BJP; it later formed the government with outside support from the Congress. It is true that winning an election and running a state are two different ball games, and the AAP has a long way to go to prove its credibility. But what is significant is that, in its debut election, a party that is a few months old overthrew a state government that has been in power in the capital for nearly 15 years.

The new political revolution and its economic impact

The AAP’s win symbolizes public disapproval of current governance, with its poor economic deliverables and corruption scandals. It also indicates the willingness of the people of India to trust an alternative corruption-free political system, as promised by the AAP. The AAP’s victory in the Delhi election has planted the seed for a transformation in the country’s political scene. There is rising demand for accountability from the government in a manner that was not so pervasive earlier. More people are coming forth to be a part of this movement, including top executives and even nonresident Indians.

With the election results of the five states and the AAP’s success, it is clear that the BJP may get most of the votes in the national elections but may not have a majority as regional parties gain significance. These regional parties may play an important role in ensuring that the newly elected government is more accountable and delivers on its promises. More participation of qualified and self-motivated people in governance will likely improve efficiency in addressing public issues and providing basic amenities and infrastructure that have been ignored so far. In addition, with less bureaucracy and corruption, policy making will likely be more pro-growth, which will help improve economic and business sentiments as well as confidence among international investors. We will monitor this growing political movement and its impact on the economy in the months ahead.


View all endnotes
  1. Hereafter, all growth percentages mentioned in the article are measured as year over year unless otherwise specified.
  2. Reserve Bank of India, Consumer confidence survey: September 2013 (round 14), September 2013,; Federation of Indian Chambers of Commerce and Industry, Business confidence survey, September 2013, Also see RBI, Industrial outlook survey: Q2: 2013–2014 (round 63), October 28, 2013,
  3. RBI, Consumer confidence survey.
  4. An index below the threshold of 100 signifies contraction.



Dr. Rumki Majumdar

Dr. Rumki Majumdar is a macroeconomist and a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, February 2014: India
Cover Image by Jessica McCourt (Cover), Stephanie Dalton Cowan (India)