Prospects about the forthcoming general elections may lift business confidence and will be the trigger for the economy, which has stabilised after downside risks eased with the rupee and current account issues under control.
"The economy has stabilised in recent quarters, though GDP growth remains well below potential. Downside risks have receded. The rupee is less vulnerable to the US Fed tapering than it was in 2013. The economy will slowly improve across 2014 but not hit potential until well into 2015," the agency said today in a report titled, 'India Outlook: Steady Growth, Lower Risk.'
Moody's Analytics is a division of Moody's Corporation that is engaged in economic research and analysis. The report is independent and does not reflect the opinions of its credit-rating wing, Moody's Investors Service.
"GDP growth will be in the 5 to 5.5 per cent range through 2014, before heading north of 6 per cent in 2015... the upturn will be led initially by exports, which started to lift from mid-2013, and then later in 2014, by an upturn in the investment cycle," analyst Glenn Levine said in the report.
Levine said, "There is a growing list of reasons to believe that the economy has started to turn the corner, albeit slowly, after 30 months of sub-par growth. Economic growth has stabilised and downside risks have fallen."
Stating that the worst may be over for the economy, Levine said the stream of bad news emanating from the economy has finally begun to slow. Externally, the global economy is stabilising, with better growth is expected this year.
Exports have already started to pick up, helping to narrow the CAD, it said, adding that "on the home front, fewer downside risks, a more competent central bank governor, and the prospect of better government after the May elections have boosted business and investor confidence."
Basing its optimism on better-than-expected third-quarter growth (Q2 of FY14), the report said the economy should steadily improve in the coming quarters as downside risks have started to recede.
On the rupee, which was one of the worst performers among Asian currencies last year, losing 11 per cent after plunging over 30 per cent earlier, the report said the local currency is now less exposed to external worries with the CAD being brought under control.
"The most notable improvement has been on the external deficit front of the economy, which has shrunk to 1.2 per cent of GDP in Q2, the smallest deficit in several years," the report said, warning that such a low CAD may not be sustainable as gold importers will find ways around the new rules and import demand will eventually recover.
On prices, it said lower inflation will help to lift business confidence and limit downside currency risk.
Moody's Analytics said it expects wholesale price inflation to continue to fall through the first half of 2014 as food inflation eases with better crop yields. In December, WPI inflation was 6.16 per cent.
"Our baseline forecast is for interest rates to remain unchanged in 2014, before slowly tightening in 2015.