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India Economy – May 2013

Source: OPEC 6/5/2013, Location: Asia

After several false starts, the government undertook a series of reforms beginning in September 2012 to tackle the burgeoning fiscal deficit and create new jobs. In late February, the government presented its last major budget of the current parliamentary term, for the fiscal year 2013/14 (April–March). The administration is attempting to balance its development priorities against the need for fiscal consolidation, and has set itself the ambitious target of cutting the budget deficit to the equivalent of 4.8% of the GDP in the coming year. It is likely to miss the target, which seems to be based on optimistic projections of revenue growth.

The government's budgetary strategy has been repeatedly challenged by a series of unfavourable developments since 2008, from the global financial crisis to a domestic economic slowdown, with the problem being exacerbated by Congress's fiscal profligacy. As a result, the federal government deficit widened from the equivalent of 2.5% of the GDP in 2007/08 to 5.7% in 2011/12.

The pace of economic expansion slowed sharply in 2012/13, owing to a host of domestic factors, including weaker business and consumer sentiment, a poor monsoon season and tight credit conditions. Growth in private consumption (which accounts for more than one-half of the nominal GDP) is estimated to have slowed to 4.1% in 2012/13, its slowest pace of expansion since 2004/05. Government consumption also decelerated to 4.1%, as the administration sought to narrow the fiscal deficit. The high cost of financing appears to have held back investment growth, which is estimated to have decelerated for the second consecutive year, to 2.5%.

On a factor–cost basis, agricultural output growth slumped to an estimated 1.8% in 2012/13 owing to the poor monsoon season. Expansion in industrial output decelerated for the second consecutive year, to an estimated 3.1% from an average of 8.2% a year between 2002/03 and 2011/12. Output in the services sector, which accounts for nearly 60% of the GDP, grew by 6.6%, marking a slowdown from an average annual growth of 9.3% in the previous decade. As a result, headline GDP growth on a factor–cost basis is estimated to have slowed to a ten-year low of 5% in 2012/13.

Since September 2012, the government has taken a series of steps to boost the economy. These include moves to lower the public subsidy bill, open up more sectors to foreign investment and fast-track approvals for infrastructure projects. It is expected these measures, combined with a loosening of monetary policy, will enable real GDP growth to rebound to around 6.0% in 2013/14.

Inflation remains a problem, also limiting the central bank’s ability to further stimulate the economy via monetary expansion. This was highlighted when it recently reduced its key policy rate by a further 25 basis points to 6.25%. Inflation in March increased again to 10.4%, slightly lower than the 10.9% in February, but it remains very high. Moreover, the government is attempting to implement its fuel subsidy bill by raising administered fuel prices, forcing bulk users of diesel (such as railway and industry) to pay market prices for fuel and allowing oil marketing companies to raise petrol prices. Food prices, which account for a large proportion of the consumer price index, have risen sharply by 13.0% in the first quarter.

Based on the HSBC Emerging Market report, Indian manufacturing output increased modestly in March, as persistent power shortages hampered production. This has been a significant issue over the past year. The latest industrial production number for February was only 0.5% higher than in the previous year, and the Markit Purchasing Manager’s Index (PMI) confirms a decelerating trend in the manufacturing sector. The manufacturing PMI for April stood at 51.1, the lowest number since November 2011. Unfortunately the very important services sector also seemed to experience a PMI deceleration to 50.7, the lowest level since October 2011.

The growth forecast for this year remains at 6.0%, but future developments need close attention. Currently, is seems there is a downside skew to risk in India, though it is still estimated to expand at a higher level than over the past year, when GDP grew by only 5.0%. The 2013 forecast will be reviewed in the coming month.

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