Economists Say Worst May Be Over For The Indian Economy But...
Economists note the modest improvement in high frequency economic indicators but say any recovery will be shallow.
Incoming data suggests that the Indian economy may have bottomed out in the third quarter of the current financial year, even though the recovery is likely to be shallow and protracted.
On Friday, industrial output data for the month of November suggested some pick-up in activity. Industrial production rose 1.8 percent in November after three months of contraction. Other indicators which have showed signs of stability include the purchasing managers’ indices, railway freight and exports. To be sure, other indicators like auto sales and bank credit continue to weaken.
In a report on Monday, Bank of America Securities said its proprietary India activity indicator was suggesting that the ‘worst is over’. The indicator rose to 5.1 percent in November from 4 percent in October and 3.15 percent in August-September. Four of the seven data points used by Bank of America Securities improved.
The brokerage house, however, added that the bottom is turning out to be “far deeper and longer” than envisaged.
While growth should recover to 6 percent by the March quarter from September quarter’s 4.3 percent, there is no doubt that the bottom has got deeper and longer than we expected.Bank of America Securities
BofA Securities’ economists Indranil Sen Gupta and Aastha Gudwani said that relatively high real lending rates continue to be one weight on growth. Still, they see some recovery in the first half of calendar year 2020.
“On balance, we grow more confident of a shallow recovery in 1H20 on base effects, lending rate cuts and a good summer rabi harvest,” they wrote.
The brokerage house also forecasts that the food price-driven spurt in inflation will peak out in December, allowing India’s Monetary Policy Committee to cut rates by another 25 basis points in February after a surprise pause.
Other economists, while also noting the slight improvement in economic data, remain cautious about calling a bottom to growth.
It may be too early to declare that the economy has “unambiguously bottomed” said Nomura Global Market Research in a note on Jan. 10, 2020. Real income for consumers is under pressure due to weak job market prospects and credit growth remains weak, said Sonal Varma and Aurodeep Nandi, India economists at Nomura.
Other indicators, too, continue to throw up mixed trends.
In December while the PMI, railway traffic, light commercial vehicles and tractor sales have performed better, we are continuing to see a further worsening of sales of passenger cars, medium heavy commercial vehicles and two-wheelers.Nomura Global Market Research
Nomura added that any recovery, subsequent to a bottoming out, is likely to remain sub-par.
Nomura expects GDP growth to slow further to 4.3 percent y-o-y in the December quarter and 4.5 percent in the quarter ended March 2020. For the full financial year, their forecast for GDP growth is at 4.7 percent, below the central bank’s forecast of 5 percent.
The March quarter is likely to witness stagflationary conditions, Nomura cautioned. With the higher inflation trajectory, fiscal slippage in the coming budget and signs of stabilisation in high frequency data, the case for keeping policy rates on hold is now stronger, the brokerage house added.