Progress on the eve of elections
To face up to difficulties, the Indian government has taken short-term measures rather than true in-depth reforms. External vulnerability has diminished sharply, but this is due to the decline in economic activity and import restrictions. The deficit of central administrations should decline, but under the impact of cutbacks in capital expenditure. Exports are driving growth as domestic demand struggles to pick up. Business leaders and investors are both waiting for the results of the next elections. The need for reforms is more urgent than ever. Unfortunately, the formation of a coalition government seems highly probable.
The economic recovery is bound to be slow
India’s Central Statistics Office has revised its growth estimates for the fiscal years 2011/12 and 2012/13. Indian growth was revised downwards by 0.5 points to 4.5% in 2012/13 from an initial forecast of 5%. Growth figures for the first half of fiscal year 2013/14 have not been revised yet. These partial revisions of GDP figures make forecasting even more difficult. Even so, looking at economic tendencies over the past few months, we can highlight some of the trends that seem to be taking shape.
In Q3 of fiscal year 2013/14, Indian GDP grew 4.7%, driven by dynamic exports (+11.4% y/y) while imports contracted (-3.8% y/y). The contribution of net exports to growth increased more than 80%, the highest in fifteen years. Domestic demand was particularly sluggish. Business investment contracted 1.1% y/y and household consumption rose only a moderate 2.5%. A sector-by-sector analysis of Indian growth confirms the trends observed in recent months: manufacturing output continues to contract and construction remains weak. The only sectors reporting relatively strong growth rates are agriculture and services, even though activity in the services sector was the weakest in five years.
Growth prospects are not very favourable either. Economic output should hold well below its long-term potential over the next two years. Even though confidence indicators are looking more upbeat, business investment continues to contract, which severely strains growth prospects. Although the results of PMI surveys for the manufacturing sector confirm a turnaround (52.5 in February, up from 51.3 in January), industrial output continues to decline. The increase in order books in both export and domestic markets still has not been transformed into an upturn in production of capital goods and consumer goods, which continued to contract in February.
BY Johanna MELKA