Sluggish exports and weak fiscal balances are offset slightly by slight improvement in manufacturing indicators, but overall economic momentum remains lacklustre.
IHS Global Insight perspective | |
Significance | Business sentiment indicators remain subdued even as it improves, core industrial-sector growth rose unexpectedly while improving and core industrial-sector growth has risen unexpectedly. Weak global demand continues to slam India's external sector, while dampened revenue collection and unrealistic expenditure and subsidy targets threaten government finances. |
Implications | Manufacturing indicators have revived marginally, but it is too soon to tell if there will be sustained improvement in the industrial sector. |
Outlook | The weak economic momentum in India will persist. Despite a positive bump in investor sentiment from the recent reinvigorated reform initiative, a sustained investment and economic recovery is still not imminent. IHS Global Insight now expects the central bank to cut the policy rate by 25 basis points in December to help shore up growth. |
Export growth continues to contract, trade deficit widens
India's merchandise exports declined 10.8% year-on-year (y/y) to USD23.7 billion in September, continuing August's negative trend (9.7% y/y decline), according to the Ministry of Commerce. But, in slightly positive news, on a month-on-month (m/m) seasonally adjusted basis, exports increased 1% in September, pointing to marginally improved trends ahead. Meanwhile, imports rose 5.1% y/y, to USD41.8 billion, with non-oil imports declining 4.5% y/y to USD27.7 billion, and oil imports rising 30.8% y/y to USD14.1 billion. The trade deficit stood at USD18.1 billion during September, up from USD15.6 billion in August.
Manufacturing sector's weak momentum persists
The purchasing managers' index (PMI) data show the weak momentum of India's manufacturing sector continuing in October, although the headline index rose from September. New orders showed some strength, and new export orders expanded for the second time since June. The headline index ticked up marginally, from 52.8 in September to 52.9 in October, and the new orders index ticked upward, from 54.4 in September to 54.9 in October, while new export orders fell from 53.8 in September to 53.6 in October. Surprisingly, PMI still remains comfortably in positive territory despite the lingering weakness in the industrial sector. Input prices continued to rise, but at a weaker rate, however, still pointing to inflation concerns.
Core infrastructure index perking up
The leading infrastructure index in India rose by 5.1% y/y in September, higher than August's 2.3% y/y growth, and the highest rate since December. The marginal strengthening is attributable to higher coal, steel, refinery, and electricity production. During September, the coal sector rose by 21% y/y, electricity, 4%; steel, 2%; fertilisers, 6%; cement, 13%; and refining, 11%. But other sectors showed declines. Natural gas declined 14% y/y, and crude oil, 4%. The eight key infrastructure sectors that make up the core sector account for about 40% of total industrial production. For April–September, the first six months of fiscal year (FY) 2012/13, infrastructure output rose by a modest 3.2% y/y, still lagging the 5.0% of the year-earlier period.
Fiscal deficit still running behind targets
The federal fiscal deficit stood at INR3.37 trillion (USD62.6 billion) for April–September, the first six months of FY2012/13, according to government data. The shortfall came in significantly above the government's originally targeted levels and amounted to 66% of the government's full-year target of INR5.14 trillion, or 5.1% of GDP. Net tax receipts stood at INR1.94 trillion, with revenue receipts standing at only 36% of the budgeted total, and total expenditures were INR6.94 trillion in April–September, at 46% of the budgeted total. During the same period in the last fiscal year, the fiscal deficit stood at 68% of the budgeted target. Corporate and individual income tax receipts remain weak on lower earnings from a slowing economy, reflecting weak federal finances. Any slippage from the fiscal gap target could force a cash-strapped government to borrow more from the market, which the government ruled out in September.
Outlook and implications
There is still only marginal improvement in economic momentum, according to these high-frequency indicators. Manufacturing seems to be showing some signs of improvement, with the PMI figures continuing to inch up – although remaining subdued – and core infrastructure growth expanding at its fastest pace in 2012, at 5.1%. Certainly, the slight uptick in PMI data might not be anything to applaud, and overall industrial activity is still muted. Overall manufacturing eked out only 0.2% y/y growth in April–June, and industrial production has remained worryingly weak, rising only 2.7% y/y in August. Encouragingly, the core index usually shows advance trends for overall industrial production data (which has been extremely volatile of late), scheduled to be released next week.
Monthly exports have been declining steadily, in line with relentless global weakness. Unexpectedly, a higher oil import bill pushed up the trade deficit in September, but this trend is unlikely to continue. Falling imports will eventually lead to narrower trade deficits in the coming months, partly due to a weaker rupee and lower oil prices. The improving current-account deficit – the current-account deficit narrowed in April–June from record highs – and reviving investment sentiment will lead to a resumption in capital inflows. Despite the recent recovery of the rupee, the still-weak currency will gradually provide a welcome boost to India's external sector and help alleviate India's large external imbalances.
India's finance minster P. Chidambaram said the government will aim to contain the fiscal deficit at 5.3% of GDP in the FY2012/13 – higher than the targeted 5.1% of GDP, but lower FY2011/13's 5.8% of GDP. Furthermore, Chidambaram outlined plans to reduce the fiscal deficit to only 3.0% of GDP by FY2016/17, although he provided few specific measures. The finance minister has pledged to maintain strict fiscal consolidation plans. Nevertheless, the fiscal deficit is likely to overshoot targets again this year. Containing the fiscal deficit, which has ballooned on poor revenue collection during the current economic downturn, remains one of India's key economic priorities, given that high fiscal deficits are deterring private investment, fuelling supply-side inflation, and delaying monetary easing.
The weak economic momentum in India will persist. In fact, IHS Global Insight has consistently downgraded our GDP forecasts in recent months, and we now expect expansion of only 5.1% in FY2012/13 (ending in March 2013) and 5.8% in FY2013/14, on domestic investment weakness and pervasive external headwinds.
Given the poor growth data and the government's recent reform initiatives, despite sticky inflation, IHS Global Insight now expects the Reserve Bank of India (RBI) to relent and cut the repo rate by a token 25 basis points when it next meets on 18 December. However, the RBI will still rightly be preoccupied with inflation for the foreseeable future and will leave measures to boost growth to the government. Although the recent reforms are a welcome first step, they are unlikely to have an immediate positive impact, and tepid economic growth will continue over the near term.