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India Economy - August 14

Source: OPEC 9/2/2014, Location: Asia

The Bharatiya Janata Party (BJP) government announced its 2014 budget on 10 July, its first since coming to power. It was lacking in ‘big bang’ reforms; instead it consisted of a long list of small policy measures, which even when taken together are unlikely to move the economy to a higher growth path. There were measures designed to improve the investment environment such as: raising the cap on FDI in the insurance and defence sectors from 26% to 49%; injecting INR2.5 trillion in public sector banks by 2018; and providing an investment allowance for small businesses. However, food inflation is one of the biggest problems plaguing the Indian population, but there were no clear policies targeted towards addressing this issue. The Reserve Bank of India (RBI) is seen as likely maintaining its anti-inflationary stance in order to ensure that wage pressures remain contained and that expectations remain anchored. Meanwhile, the implementation of the Goods and Services Tax plan, which has been on hold for the past two years and has the potential to raise government revenue significantly, was mentioned; but no roadmap of its actual execution was outlined.

Similarly, India’s Finance Minister recently talked about the need to overhaul the subsidy regime, but details on the changes were missing. The BJP government is likely to continue to support its right to maintain food subsidies in spite of pressure to accede to the WTO regime. Inflation on both the WPI and CPI measures eased in June. In other words, it seems that inflation risks in India have abated over the last month, which is encouraging. Inflation is still much higher than the RBI would like, so it has maintained the repo rate at 8% in June. Since interest rates are unlikely to be cut before early 2015, tight monetary policy will be a drag on domestic demand, while high corporate indebtedness and a weak banking sector will continue to hold back investment. In addition, there is little room to manoeuvre in fiscal policy.

India's merchandise trade deficit widened 4.3% y-o-y in June to $11.8 billion, also up from May's $11.2 billion, data released by the commerce and industry ministry showed. After having contracted for 11 months, merchandise imports raised 8.3% y-o-y to $38.2 billion, likely reversing the negative imports growth trend. Non-oil imports accelerated 7.0% y-o-y in June, largely reflecting a surge in gold imports. Gold imports jumped 65% in June after the RBI allowed more banks and traders to buy bullion overseas. The government had originally put restrictions on gold purchases from abroad in June 2013. But with some of these restrictions removed this June, and with the base effects coming into play, gold imports grew 65.1% y-o-y to $3.12 billion during the month. Meanwhile, oil imports also accelerated, rising 10.9% y-o-y in June, reflecting rising global oil prices. Merchandise exports growth also remained in double digits in June, with exports rising 10.9% y-o-y to $26.5 billion.

Finally, the manufacturing sector is starting to pick up steam. A flood of new orders from both domestic and external sources has led to a surge in activity, pushing the manufacturing PMI to a 17-month high. Details within the survey show that all monitored categories witnessed a rise in output and order flows. However, the speed of the recovery has also lifted price pressures, with input prices rising steeply. Business conditions in the Indian manufacturing sector improved for a ninth consecutive month in July, as companies scaled up production in response to robust levels of demand. But employment deteriorated, while inflationary pressures continued to emerge, particularly on the supply side. The manufacturing PMI reached a 17-month peak of 53.0 in July, up from 51.5 in June. The reading signalled a solid improvement in business conditions. A significant improvement could also be seen in industrial production with the exception of food products.

India’s economic situation deteriorated significantly between 2011 and 2013, making the country more vulnerable to domestic and external shocks. GDP growth has slowed and the government’s current account balance deficits have only recently narrowed from unsustainable levels after drastic actions by the government, including policies to curb gold imports and sharp cuts to capital spending. And although the economy is now more stable, sluggish growth and unfavourable domestic conditions (including high inflation, tight monetary policy and a poor investment environment) mean that much still needs to be done before the country is on a more secure footing.

The inflation, industrial production and exports quantities were all slightly better than expected in the 2Q. But growth expectations remain unchanged at 5.5% in 2014 and 5.8% in 2015 because the underlying problems facing the domestic economy will continue to restrict India’s GDP growth.

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Related Categories: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Industrial Development  Insurance  Investment  Mergers and Acquisitions  Risk Management 

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