Sharper Slowdown, Slower Recovery? How India Compares To  Emerging Market Peers
A worker looks down from a house under construction in Leh, Jammu and Kashmir, India. Photographer: Prashanth Vishwanathan/Bloomberg

Sharper Slowdown, Slower Recovery? How India Compares To Emerging Market Peers

The slowdown in the Indian economy, which has grabbed headlines locally, is also attracting global attention.

Earlier this week, Kristalina Georgieva, the recently appointed chief of the International Monetary Fund, noted that economic growth is expected to be slowed in 90 percent of the world economies in 2019. The slowdown, however, is more pronounced in emerging market economies like India and Brazil, Georgieva said.

The IMF is due to release its updated growth forecasts for global economies next week. Economist estimates collated by Bloomberg, however, suggest that the slowdown in the Indian economy has proved to be steeper and more long-lasting compared to peer economies in the ‘BRICS’ grouping.

According to Bloomberg estimates, the Indian economy will slow for the fourth consecutive year in 2019-20, with GDP growth pegged at 6.2 percent in the current year. At these levels, the Indian economy has seen growth slow by nearly 2 percentage points since 2016-17, when GDP grew by 8.2 percent.

Moody’s Investors Service, which pared India’s GDP growth forecast on Thursday, said that a sustainable growth rate of 7.5-8 percent, which seemed possible till a couple of years ago, now seems unlikely for India. The rating agency believes that India’s slowdown is driven by multiple and ‘partly long-lasting’ factors. It projects growth in the Indian economy at 7 percent in the medium term.

Other BRICS economies follow the calendar year in contrast to the April-March year followed by India. As such the estimates are not directly comparable with India. The extent of slowdown expected in these individual economies, however, is more modest than in the case of India.

For instance, the Chinese economy, too, is expected to slow in both 2019 and 2020. Over the four-year period, growth in China has moderated from 6.9 percent to a forecast 6 percent in 2020.

The slowdown in South Africa is seen extending for a third year, with growth expected to moderate to 0.5 percent compared to 1.4 percent two year ago.

Brazil and Russia are expected to see moderating growth in 2019 but a rebound in 2020, show Bloomberg estimates.

The growth slowdown in India is sharp, said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura. “For a relatively less open economy, India has seen a sharp growth slowdown. While weak global demand has, of course, also had an adverse impact, we believe that the shadow banking crisis is responsible for the larger than expected slowdown in India,” Varma told BloombergQuint.

India has failed to buck the global slowdown trend even though it is primarily a domestic demand led economy, said Priyanka Kishore, head of India and South East Asia economics at Oxford Economics.

Homegrown problems, such as continued financial sector stresses, have had an outsized impact on the internal drivers of growth - consumption and investment, at a time when the external environment has turned particularly challenging. Worryingly, high frequency data has yet to signal a convincing bottoming out of growth, despite the substantial monetary policy stimulus already in place.
Priyanka Kishore, Head - India and South East Asia Economics, Oxford Economics

Marie Diron, managing director-sovereign risk at Moody’s, told BloombergQuint that even the 5.8 percent GDP growth expected by the ratings agency for India in 2019-20 is high when compared to global standards.

The slowdown has been more marked in India compared to other emerging markets, at least in Asia, said Diron. “But it is, in the case of India, a slowdown from higher levels. Even 5.8 percent is a very fast pace of growth, fueled by steady population growth and still rising incomes,” she added. According to Diron, the sources of slowdown in India are more domestic compared to other Asian emerging economies where the weakness is linked to global trade tensions and exports.

Inflation, Current Account Deficit In Check

While growth has weakened, India’s performance on inflation and current account deficit has been steady.

After years of high inflation, India has seen price pressures moderate. For the second year running, inflation is seen remaining within the flexible inflation target of 4 (+/- 2) percent.

India’s inflation rate is now the second lowest among BRICS economies after China.

Subdued final demand and muted inflation have permitted accommodative monetary policy in most emerging markets, including India. India’s Monetary Policy Committee has been able to pare rates even amidst a reversal in food prices as CPI inflation in India has remained below the target of 4 percent.

While inflation in India is lower than in Brazil, Russia and South Africa, price pressures in these other economies are also modest, allowing for monetary policy easing.

India’s current account deficit also remains within comfortable limits, although the gap is the second widest among the BRICS economies.

Of the BRICS economies, China and Russia run current account surpluses.

South Africa has the widest current account at 4 percent of GDP.

India’s current account deficit stood at 2 percent of GDP in the April-June 2019 quarter. For Brazil, the gap stood at 1.48 percent of GDP.

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