India: Signs of stabilisation but little scope for major improvement

GDP growth decelerated to 4.4 per cent year-on-year in the second quarter; weaker than expected (Chart 1). The deceleration was widespread but there were signs of stabilisation in Q3. We have revised our already below-consensus forecast downward; we expect GDP to climb 4.7 per cent in 2013 and 5.5 per cent in 2014. In 2015, growth will accelerate to 6.0 per cent. New central bank governor Raghuram Rajan has launched a reform package focusing on financial sector liberalisation. India has been hard hit by worries about Fed tapering, with substantial negative effects on the rupee and the stock market, but central bank reforms have stabilised financial markets for the time being. (Chart 2) However, the government has not done its part, having introduced extended food subsidies and a land acquisition bill that could increase the time taken to acquire land. In August, the purchasing managers index (PMI) in manufacturing fell below 50 for the first time since 2009 but recovered somewhat to 49.6 in September. (Chart 3) Industrial production shows signs of stabilisation, increasing slightly year-on-year in July and August. (Chart 4) Car sales have edged up recently, increasing 0.7 per cent year-on-year in September. (Chart 5) Exports have recently performed strongly, increasing more than 10 per cent year-onyear for three consecutive months. Imports have performed poorly, falling more than 18 per cent year-on-year in September. (Chart 6) The diverging trends for exports and imports pushed the trade deficit to its lowest level for 30 months in September. The current account deficit widened in Q2. (Chart 7) However, the recent marked improvement in the trade balance is expected to decrease the deficit in Q3. Wholesale price index (WPI) inflation has accelerated in recent months; hitting a seven-month high of 6.5 per cent in September. A substantial increase in food price inflation has contributed. CPI inflation remains elevated, at around 10 per cent. (Chart 8) The Reserve Bank of India (RBI) hiked its key interest rate by 25 basis points to 7.5 per cent in September. (Chart 9) We expect another rate hike before year-end.
Key data Percentage change

WEDNESDAY OCTOBER 16, 2013 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2012 2013 2014 2015 GDP* Inflation (wholesale)* USD/INR** 5.1 7.5 54.9 4.7 5.9 65.0 5.5 6.0 60.0 6.0 6.0 55.0

* Percentage change. ** End of period. Source: Macrobond, Ministry of Commerce and Industry, SEB.

Economic Insights

CHARTS ON THE INDIAN ECONOMY