Slowdown Inevitable, Election Poses Risk
We maintain our 5.0% GDP growth forecast for FY2009/10 (April-March), with resilient growth in the agricultural and service sectors softening the impact of the ongoing slowdown in the manufacturing sector. Fiscal stimulus will also provide a boost, but an unfavourable outcome of the general elections in April-May constitutes a clear risk to an economic recovery. We nevertheless expect GDP growth of 6.4% in FY2010/11 as the global economy starts to improve and capital inflows to India resume in earnest. India has often been heralded as a more domestically driven growth story than the heavily export- dependent China and thus more resilient to shifts in demand in G3 markets. While we do not contest the general gist of this theory, we maintain that India is far from immune from developments in developed economies and global financial markets.
Admittedly, the slowdown of the Indian economy has so far been less severe than in developed markets and more export-dependent developing nations. India's GDP growth slowed to 5.3% y-o-y in Q408 (calendar year), a sharp contrast to the economic contractions seen in more trade-dependent East Asian nations like Singapore, South Korea and Taiwan in the same quarter. Nonetheless, the Q408 reading constituted a marked deceleration in Indian growth which has been in place since Q306 with y-o-y growth dropping from 7.6% in Q308 as both the agricultural and manufacturing sectors posted negative growth, of 2.2% and 0.2% y-o-y respectively.
The deteriorating economic conditions in H208 prompted us to revise down our economic outlook for India, which now pencils in GDP growth of 6.3% in FY2008/09 (April-March) and 5.0% in FY2009/10. The United Progressive Alliance (UPA) coalition government has maintained its 7.1% growth target for FY08/09, most likely in view of not giving the opposition Bharatiya Janata Party (BJP) a platform for attacking the government's poor track record on economic reform during its five years in office, during which the UPA has been reliant on parliamentary support from the staunchly Communist Party of India (Marxists) (CPI(M)). The outcome of the April 16-May 13 elections is still uncertain, but will most likely result in another precarious coalition government dependent on support from smaller parties in the Lok Sabha (lower house of parliament).
We estimate growth in Q109 (calendar year) to slow further to 4.8% y-o-y as increased government spending should only serve to offset part of the weakening in private consumption and corporate investment. Indeed, macroeconomic data for Q109 support our view that the Indian economy is
continuing its slowdown in spite of the strong stimulus measures implemented by the government and the
© Business Monitor International Ltd Page 30 Industrial production dipped by 1.2% y-o-y in February, its lowest reading since at least April 1994, as the corporate sector continued to pare back production of consumer goods. The trend of the industrial production index has largely mirrored that of GDP growth in recent years, reflecting the growing importance of the manufacturing sector in the Indian economy. As such, growth in the industrial
production index rose to double-digit figures for much of FY2006/07 before gradually trending down and dropping into negative territory in December 2008.
Industrial Production And Exports Bottoming Out
While still nominally negative, we nonetheless view the February reading as a tentative sign that the manufacturing sector may now be bottoming out after what is likely to be another quarter of negative growth in y-o-y terms in Q109. Firstly, the industrial production reading was depressed by a reduced number of working days compared to the year-ago period. Secondly, the capital goods and consumer non- durables sub-indices have shown signs of bottoming out in recent months, which is encouraging, although both indices are inherently volatile.
We expect the industrial production index to drop further in March, before gradually returning to positive territory over FY2009/10, averaging 2.9% over the year as the government's fiscal stimulus package helps drives up consumer and corporate spending. However, the fortunes of the manufacturing sector will be very much linked with overseas sales, with the Federation of Indian Export Organisations (FIEO) predicting in January that up to ten million jobs could be lost due to falling exports.
Exports fell by 21.7% y-o-y in February, the sharpest drop in at least 13 years, with provisional figures released in early April showing that exports in March were down by 31% y-o-y. However, we estimate that this could be the trough and are projecting exports to drop by 13.4% for FY09/10 as a whole. We are projecting imports to concomitantly drop by 16.5% in FY09/10 as lower commodity prices add to a reduced demand for input goods from overseas. We thus expect the net exports component of GDP, which has been negative since FY2004/05, to contract by 18.3% in FY09/10, thus contributing 1.1 percentage points to overall GDP growth.
Nonetheless, it is clear that growth in India will continue to be driven by domestic demand with the government attempting to supplant the demand injection provided by strong net capital inflows, which ceased in H208, by increased government spending. Indeed, India's process of fiscal consolidation, aimed at bringing down its chronic budget deficits, has been put into question altogether by the economic stimulus packages announced by the outgoing UPA government. While a more expansive fiscal policy was expected ahead of the elections, the government abandoned its commitment to consolidating India's fiscal accounts completely in Q408 as incoming government revenue receipts drove home the extent of the ongoing downturn.
© Business Monitor International Ltd Page 31 As such, the interim budget for FY2009/10 presented on February 16 was highly expansive in nature, envisaging a 6.0% of GDP fiscal deficit in FY08/09 followed by a 5.5% shortfall in FY09/10. The details of the budget were largely left for the incoming government to fill. Whatever the composition of the government taking office, we do not expect any major changes in the presented spending plans, which were heavily weighted towards the agricultural sector and rural development.
Government Programmes To Boost Rural Growth
One of the main features of the presented budget was the extension of the farm debt waiver programme, initiated in the FY2007/08 budget and now totalling INR653bn (US$13bn) of abandoned public debt to roughly 36 million farmers. This should be welcomed as the 2.2% y-o-y contraction of the agricultural sector in Q408, which was mainly due to a high base in Q407, has undermined claims that the largely agrarian economy of rural India, to a great extent isolated from developments in the outside world, would provide a buffer for GDP growth. However, we are not overly concerned by this negative figure as the absence of proper irrigation systems, making Indian farmers excessively dependent on a good monsoon rainfall, has made growth in the Indian agricultural sector considerably more volatile than in other GDP sectors, as shown in the chart below.
We expect real growth in the agricultural sector to bounce back to 3.45% in FY09/10 after an estimated 2.83% expansion in FY08/09 on the back of normal precipitation during the June-September monsoon season as predicted by the India Meterorological Department on April 17, with the farm debt waiver programme boosting investment in the sector.
In addition to the farm debt waiver programme, the UPA government has also expanded the National Rural Employment Guarantee Act (NREGA), a programme initiated in 2005 guaranteeing 100 days of paid labour for unemployed rural Indians. The scheme, the cost of which has been estimated at INR301bn (US$6bn) or 0.6% of GDP, carries the potential to raise growth in rural India through an improved irrigation and transport network, but anecdotal evidence suggests that a substantial amount of the funds have been squandered through corruption and in projects with little real value.
While investment in the Rural Infrastructure Development Fund and other public infrastructure projects should bring more substantial benefits to the economy, we still fear that the gains of the government's massive fiscal stimulus will primarily be in the form of a short-term boost in employment and spending rather than by higher growth in the longer term. With implementation of the public infrastructure programme likely to carry over into 2010 we see GDP expanding by 6.4% in FY2010/11, with economic activity also being supported by the global economy returning to positive growth of 1.7% and 3.0% in 2010 and 2011 respectively after an expected 2.3% contraction in 2009.
Empirical evidence shows that capital inflows to emerging markets are highly correlated with economic growth in developed economies. We thus expect the gradual return towards normal growth rates in the
© Business Monitor International Ltd Page 32 EU, the US and Japan to be coupled with rising investment flows to EM, with India likely to yet again be one of the main recipients. While this will help raise growth towards an average of 7.0% over FY2011/12 to FY2017/18, we reiterate that continued economic reform and increased investment, both public and private, in education and infrastructure will be needed for this expansion rate to be maintained.
Table: India – Economic Activity
2006 2007 2008e 2009f 2010f 2011f 2012f 2013 Nominal GDP, INRbn 1,4 46,936.0 53,752.1 59,374.5 67,241.8 75,630.5 84,372.2 93,772.9 106,547.2 Nominal GDP, US$bn 2,5 841.52 1,074.19 1,171.19 1,350.57 1,534.16 1,632.99 1,833.48 1,989.58 Real GDP growth, % change y-o-y 3,5 9.7 9.0 6.3 5.0 6.4 7.0 7.0 7.0 Population, mn 6 1,155.30 1,172.20 1,189.40 1,207.00 1,224.30 1,240.30 1,256.60 1,273.10 Industrial production
index, % y-o-y, ave 5 11.5 8.6 2.3 2.9 10.5 11.1 9.5 8.0
Unemployment, % of
labour force, eop 6 8.0 8.0 9.0 10.0 9.0 8.5 8.3 8.0
Note: e/f = BMI estimate/forecast. 1 Fiscal years ending March 31 (1989=1989/90); 2 2008 = FY2008/09, Factor Cost, f = BMI forecast; 3 Factor Cost, f = BMI forecast. Source: 4 Asian Development Bank. 5 Central Statistics Organisation; 6
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