India’s economy at a glance – September 2019

India’s economy needs a stimulatory kick start, with no guarantees of recovery.

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In this month’s Forward View – Global, we highlighted the slowing trends in India as a driver of a weaker global outlook. This special note highlights the recent economic trends and our forecasts for the Indian economy.

  • India’s economic growth continued to slow in the June quarter – down to 5.0% yoy (compared with a relatively weak 5.8% in Q1). This was the slowest rate of growth since March 2013, with weakness in both private consumption and investment persisting from the previous quarter. We have lowered our forecast for Indian growth, given the weaker than expected outcome in Q2, with growth at 5.7% in 2019, 6.8% in 2020 and 7.1% in 2021. Easing monetary policy is expected to support a modest recovery in the short term (led by investment), however downside risks (particularly around consumption) persist.
  • A key uncertainty is the Government’s commitment to its fiscal deficit target (3.3% of GDP) this financial year. Estimates from the Controller General of Accounts suggest that around 78% of this target was used in the first four months of the year (ending July). Despite a record transfer from the Reserve Bank of India – equivalent to around 0.9% of GDP – the Government will have to substantially curtail spending in coming months to meet this target – particularly following corporate tax cuts announced in September that could be around 0.7% of GDP (according to some estimates).
  • Following a weak period at the start of 2019, India’s industrial production recovered in the middle of the year – with growth stabilising in July at around 3.3% yoy (on a three month moving average basis). It is worth noting that this increase is well below the trend between Q4 2017 and Q4 2018. Conditions are mixed across the industrial sector, with automotive manufacturing particularly struggling.
  • The Reserve Bank of India has continued to ease monetary policy, cutting the Repurchase Rate by 35bps in June to a 9 year low of 5.4%. The 35bps cut was larger than expected and was the fourth straight rate cut in 2019. At the time of writing, markets have priced in cuts at the October 2019, December 2019 and February 2020 meetings, totalling around 50 basis points. Such moves would bring rates close to the lows implemented following the GFC.
  • Access to credit remains an issue for many borrowers. The collapse of a high profile non-bank lender in late 2018 has led to a liquidity crisis in the shadow banking sector – with banks and other funding sources pulling back as risk concerns became elevated. So far there is little sign of improvement, largely cutting off finance to portions of the economy.

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