India

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India

India

Asia Pacific Economic Outlook, January 2013

Despite challenges, GDP growth in India is likely to accelerate. Retail sector reforms and initiatives to reduce infrastructure bottlenecks may be slow, but the economy seems to have turned a corner.

The Indian economy grew a mere 5.3 percent in the second quarter of the 2012–2013 fiscal year, but some indicators suggest that growth may have bottomed out. Despite macroeconomic challenges, businesses are optimistic about India’s growth prospects during the first quarter of 2013. Industrial activity accelerated by 8.3 percent in October, but declined in November 2012. The Index of Industrial Production will likely register an uptick in the coming months owing to base effects and an improved performance in some sub-sectors. Meanwhile, sowing for the winter crop has increased, and the prospects for agriculture growth are improving. It may take a while before the impact of retail sector reforms and policy initiatives to remove infrastructure bottlenecks are felt across the economy, but the Indian economy seems to have turned a corner. While the agriculture and industry sectors will likely experience a slight improvement, the services sector is expected to gather momentum. In all likelihood, the economy will perform marginally better in 2013.

Supported by an uptick in new orders, India’s services sector output grew at its fastest pace in three months. Following November’s reading of 52.1, the HSBC Services Purchasing Managers Index rose to 55.6 in December, signaling a sharp expansion. Meanwhile, in December, the HSBC Manufacturing Purchasing Managers Index indicated an improvement in manufacturing activity. The index rose to 54.7 in December, following readings of 53.7 in November and 52.9 in October. Moreover, the composite index posted its sharpest increase since February 2012 and came in at 56.3 in December, up from 53.2 in November.

Following an aggressive 50 basis point rate cut in April 2012, the Reserve Bank of India (RBI) has been fairly cautious in conducting its monetary policy. In its monetary policy meeting in December, the RBI once again chose to keep the policy rate unchanged. Moreover, the RBI did not tinker with the cash reserve ratio either. Amid elevated borrowing costs, industry players have consistently demanded a policy rate cut. However, the RBI has not acceded since the inflation rate is still beyond the central bank’s comfort zone.

Meanwhile, in December, wholesale price inflation fell below 7.2 percent. Inflation was slightly above 7.2 percent in November and stood at 7.3 percent in October. If inflation continues to fall, the RBI is very likely to lower its policy rate in its January meeting. However, the decision will not be a straightforward one. While the downward trend in wholesale inflation is a welcome sign, retail inflation remains elevated. Retail inflation surged to 10.6 percent in December following readings of 9.9 percent, 9.8 percent and 9.7 percent respectively in last three months. Both the food and non-food components of the retail inflation index suggest persistent inflationary pressure; however, core inflation remains relatively low.

Meanwhile, sowing for the winter crop has increased, and the prospects for agriculture growth are improving.

In addition, the government continues to grapple with its twin deficit problem. Owing to slower GDP growth, the government is unlikely to achieve its projected tax revenues. Moreover, the telecom spectrum auction left a significant shortfall in the government’s collection target. Spectrum sale proceeds came in at approximately $1.7 billion against the government’s estimate of $5.5 billion. As a result, the government has not made significant progress in terms of fiscal consolidation. Furthermore, India’s current account deficit rose to 5.4 percent of GDP in the second quarter of the 2012–2013 fiscal year, up from 3.9 percent in the first quarter. Export growth fell faster than imports during the second quarter. Moreover, the import bill was partly buoyed by a pick-up in imports of gold. As a countermeasure, the finance minister indicated that the customs duty on gold will be increased to make gold imports more expensive. In the coming months, a global recovery will likely support a revival in the export sector. However, India’s import basket, which consists largely of petroleum imports, will likely continue to exert pressure on the country’s current account.

A push for reforms is kindling optimism in India, but downside risks persist. While the economy reels under the impact of global economic uncertainty, domestic macroeconomic challenges accentuate the problem. As a result, the Indian economy is experiencing one of its slowest growth rates in nearly a decade. Inflation continues to remain elevated, and the central bank will be wary of cutting interest rates too soon. Although the outlook for the coming quarters is encouraging, GDP growth will be moderate. The Indian economy is likely to grow between 5.4 and 5.7 percent in the 2012–2013 fiscal year.

Asia Pacific Economic Outlook, January 2013
Cover Image by Stephanie Dalton