The change in economic growth in 2014 picked up, accelerating to 5% on an expenditure basis from 4.7% in 2013. In the first three quarters of 2014, y-o-y growth averaged an encouraging 5.2%. However, there seem to be further improvements in the country's GDP growth rate in the 4Q14. Thus, expectations for 2014 have remained unchanged at 5.5%. In addition, higher household spending, on the back of moderating inflation and a gradual loosening of monetary policy, are also expected to boost mid-term growth. The revival of pending infrastructure projects may also help growth to accelerate in 2015. Looking further ahead, it is expected that GDP growth will rise to an average of 6.0% in 2015 from 5.8%, driven by strong fundamentals, notably high savings and investment rates, rapid growth in the workforce, an expanding middle class and a further shift away from low-productivity agriculture.
Lower commodity prices will aid the government in its bid to curtail its fiscal deficit. The ruling Indian People's Party (BJP) has retained the low 4.1% deficit target for 2014 set by the United Progressive Alliance (UPA) administration in February of last year as part of the pre-election interim budget. Although the RBI cut the repo rate in January 2015 by 25 bp to 7.75% from 8%, the move was not a complete surprise. A first rate cut had originally been forecast to take place after the release of the new budget in February 2015 given the RBI's guidance that fiscal consolidation was a pre-condition to any easing.
India’s trade deficit narrowed dramatically in December, after widening sharply over the last two months, to $9.4 billion from $16.9 billion in November. Gold imports plunged to $1.3 billion in December from $5.6 billion in November. Oil is India's single largest import and net oil imports have averaged about 5.5% of GDP over the last three years. Based on J.P. Morgan's forecast of a $50/b fall in average oil prices between 2014 and 2015, this could constitute a very large positive terms of trade shock for India. The first indication of how significant the oil price impact can be on India's external balances is that the current account in the 1Q15 is expected to show its first surplus in eight years.
Industrial production has made an impressive recovery in November to 3.25% y-o-y from -3.54% in October. Automobile production in November bounced back sharply, growing at a seasonally adjusted rate of 10.3% m-o-m, to offset some of October's weakness. It is likely to lift consumer durables production. Other high frequency data, including the manufacturing PMI and railways traffic growth, are consistent with a modest recovery in activity.
Inflation based on India's consumer price index (CPI) is expected to remain below 6% in the first half of 2015, in response to recent commodities and oil price moves. However, any future easing is likely to be contingent on the budget and future policy actions. The RBI governor's policy statement included the statement that: “Key to further easing is data that confirm continuing disinflationary pressures.” But also critical would be a sustained high quality fiscal consolidation, as well as steps to overcome existing supply constraints, and assure the availability of key inputs such as power, land, minerals and infrastructure. The latter, in particular, would be needed to ensure that potential output rises above the projected pick-up in growth in the coming quarters (4Q14, 1Q15 and 2Q15) so as to contain inflation.
Separately, if food price disinflation continues, or growth disappoints, or the oil price continues to tumble, room may open up for another 25 bp cut later in the year. December's CPI inflation decreased to 5% from 4.4% in November, driven entirely by food prices, with vegetable prices continuing to fall and declining much more than the high frequency food price data had suggested. Oil may also have had an indirect impact by reducing transportation costs for food after the 15% drop in diesel prices over the last three months. Core inflation, which includes gasoline and diesel prices, declined further to 5.4% y-o-y from 5.7% in November.
The wholesale price index (WPI) fell sequentially for the fourth consecutive month in December, pushing down the y-o-y inflation rate to 0.1%. In contrast to the CPI, which has a large non-tradable component, the WPI basket is closely linked to global commodities.