After robust 2Q14 GDP figures (5.7% y-o-y), it seems the 3Q GDP growth rate is set to decelerate because the factors that drove 2Q growth – strong government spending and strong agricultural growth, reflecting a buoyant winter crop – seem to have be transient. Industrial production weakness moderated India's real growth again during the third quarter.
India's merchandise trade deficit widened sharply in September, with imports surging 26% y-o-y to $14.2 billion from $10.8 billion in August, outpacing the modest rise in exports. Total merchandise exports improved marginally in September, supported by strong shipments of cereals and oil seeds, textiles and engineering goods. However, a much stronger rise in imports drove the trade deficit to its highest level since May 2013, bringing back memories of strong current account pressures during the previous year. The surge in merchandise imports was almost entirely driven by higher demand for gold, following the partial removal of restrictions on gold imports, and by consumer goods, as the festival season in India drew closer. Gold imports rose to $3.7 billion in September from an average of $2.5 billion over the previous three months. Capital goods imports also rose slightly, reflecting a tentative recovery in India's investment demand. Oil imports saw an increase to $14.2 billion in September from $12.8 billion, accounting for much of the trade deficit surprise.
The PMI for India strengthened to 51.6 points in October from 51.0 points in August, helped by across the board improvements in various sub-indices. Of note was the pickup in domestic orders, which gained nearly two points during the month to settle at 53.0, and the sustained expansion in export orders, now at a four-month high of 54.3.
India's retail inflation continues to be moderate, which can largely be attributed to the high base effect of the previous year. The most notable moderation in retail inflation has been in urban areas, where the government's accelerated efforts to improve food supply and distribution management helped keep food prices in check, despite pockets of shortages following the dry monsoon season and recent floods. Reflecting the favourable base effect and a genuine softening of inflation momentum, the headline Consumer Price Index (CPI) dropped down to 6.5% y-o-y in September from 7.8% in August. Like the CPI, the September Wholesale Price Index (WPI) fell hard to 2.4% y-o-y – the lowest rate in almost five years – from 3.7% in August, on both a favourable base effect and decelerating underlying momentum.
In terms of fuel price deregulation, as the sharp correction in international oil prices has turned diesel subsidies into over-recoveries, the Indian government announced that diesel prices will be deregulated, effective immediately. The reduction in oil prices over the last two months, in conjunction with the fact that diesel prices have increased by INR 0.50 per litre every month since January 2013, has meant that oil marketing companies which have been sustaining losses on the sale of diesel for a decade are now facing over-recoveries, with the domestic sale price higher than the international price of crude would warrant. As a consequence of deregulation, diesel prices fell INR 3.37 per litre (or about 5% on average). In addition, a new mechanism for domestic gas pricing was announced and it seems that initial pricing is much lower than market expectation.
Despite the growth upgrade, India continues to struggle with serious underlying problems. High inflation and relatively tight monetary policy will dampen domestic demand, while private and government investment will be further hindered by high corporate debt and a broad fiscal deficit. The growth expectation for 2014 remains unchanged at 5.5%, rising to 5.8% in 2015.