India Economy - November 2012

We have forecast that real GDP growth would average 5.7% year-on-year in 2012 and will pick up in the first half of the next fiscal year, increasing the annual GDP growth to 6.6% for 2013. The pace of expansion in the manufacturing sector remained stable in September, according to the HSBC Purchasing Managers' Index (PMI). Services growth, meanwhile, accelerated for the third consecutive month.

This PMI index reading for the manufacturing sector in September is in line with the figures for August, but below the long-term average. An ongoing energy shortage has meant that the backlog of orders in the manufacturing sector continues to rise. The services sector showed strong growth, with an index reading of 55.8 in September vis-a-vis 55 in August. Input prices rose for both manufacturing and services, owing to higher prices for fuel and raw materials, as well as higher wage costs in the services sector, according to HSBC's survey respondents.

Although output prices in the manufacturing sector eased, the rate of inflation accelerated in the services sector — the largest sector of India's economy — indicating that inflationary pressurescontinue to be elevated. Wholesale price inflation rose to 7.8% year-on year in September — the fastest rate of increase in wholesale prices since November 2011. The rate of consumer price inflation (measured by the consumer price index, or CPI) meanwhile moderated slightly to 9.7% in September, from 10% in August. As a result, we expect the Reserve Bank of India to eschew any further easing of monetary policy until the 1Q13.

Although both the manufacturing and services sectors’ PMI readings remain below the long-term average, the stabilization of manufacturing growth and the acceleration of the services sector’s expansion indicate that economic growth is picking up. This, together with contracting foreign demand, has ended in a widening trade gap in recent months. Data released by the Ministry of Commerce in October indicated that India's merchandise exports fell by 10.8% year-on-year in September, to $23.7 bn, while imports rose by 5.1%, ending four consecutive months of y-o-y decline.

The trade deficit consequently reached its widest point in 11 months, at US$18.1 bn. Meanwhile, due to the large budget deficit, the government has started to consolidate its fiscal stance. On 29 October, the finance minister, P Chidambaram, announced a five-year fiscal roadmap aimed at lowering the fiscal deficit to the equivalent of 3% of GDP by the April-March fiscal year 2016/17 (EIU, November 2012).