Moody's Analytics today said India is growing but below its potential as politics is weighing on the economy and termed the national government as the "single biggest drag" on business activity.
India's outlook is still underachieving and poor management has dragged economic growth to below potential, Moody's Analytics Senior Economist Glenn Levine said.
"The single biggest factor weighing on the outlook is the Indian government. In all economies it is impossible to separate the economic from the political outlook, and that is particularly the case in India," Levine said.
The report further noted that there is broad-based weakness in the economy as all sectors are vulnerable.
"Softer global conditions, weak investor and business confidence, government paralysis, and tight monetary conditions are all weighing on demand. Almost all sectors have slowed, with particular weakness in manufacturing and mining, alongside a worrying contraction in private investment," the report said.
GDP growth slowed to 6.1 per cent year-on-year in the fourth quarter of 2011, the slowest pace since 2008, and is growing at around 6 per cent through the first half of 2012. However, a steady upturn in activity is likely to lift the second-half GDP growth to 6.5 per cent.
This puts 2012 growth substantially below India's potential of around 7.5 per cent.
"Risks are still tilted to the downside because of the dire political situation, though there are some reasons for optimism. We see growth accelerating through 2012, but it won't hit potential until the second half of 2013," Moody's Analytics said.
The report further said that the national government weighed down by corruption and funding scandals, has passed no notable bills.
"The government has lost all momentum, and progress is unlikely on existing bills like land reform, fuel subsidies, labour rights, and the much-discussed supermarket reforms between now and the next national election in 2014," it said.
The report termed Prime Minister Manmohan Singh as an "ageing technocrat who now appears tired of the rough and tumble of Indian politics" and added that the UPA didn't have the numbers or the leaders to push through tough-minded reforms needed to drive the next wave of growth.
Some of the other political risks include possible tensions with China, as highlighted by India's recent missile launch, and Maoist insurgency spread across nine states.
However, the Reserve Bank of India's bigger than expected 50 basis points interest rates cut in April is a positive move and it will lift demand from the second half