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Down but not out
FY12 GDP growth to moderate to 7.5% from 8.5% in FY11;
FY13 growth forecast lowered to 8%.
Inflation, monetary tightening, fiscal and the ongoing
monsoon season remain the key worries.
Shifting risk appetite could affect capital inflows but the
gradual capital account liberalisation continues.
Growth moderation likely to be temporary
It has been another tumultuous three months for India due to a combination
of negative economic and political developments. Already reeling under the
adverse effects of the corruption scandals and inaction on the policy front,
the country has had to continue living with high inflation which prompted a
more aggressive 50bp rate increase by the RBI in May. Growth is already
moderating, as desired by policy, and the government – finally – bit the
bullet and announced the long overdue hike in local fuel prices. Whether this
action will mark the start of a positive policy activism remains to be seen,
but the bold, politically unpopular, decision is not to be dismissed.
1Q11 GDP grew at a slower-than-expected 7.8% YoY. However, in part,
this reflects a sizeable (1ppt) upward revision to 1Q10 growth which makes
for a less flattering base. Non-agricultural GDP growth was little changed, at
7.8% YoY, from the 8% YoY of 4Q10. The government has announced a
new time series for monthly industrial production (IP) which shows stronger
(if still moderating) industrial activity and a better tone for capital goods
production. This confirms our belief that the old IP data were overstating the
pace of moderation. But there is still a moderation. Domestic demand, driven
largely by robust private consumption, is slowing, especially in the ratesensitive areas such as vehicle sales.
Cyclical headwinds are battling structural tailwinds in India, with the
government’s inaction on policy adding a more complicated dimension to
the near-term economic outlook (discussed in detail in the Viewpoint
section). We expect that GDP growth will slow to 7.5% in the current fiscal
year, from 8.5% in FY11, due to a combination of monetary tightening and
weaker-than-expected investment, the latter also being a casualty of a lack of
action from the government and the hit to business confidence from the
corruption scandals. However, there are some signs of pickup in
activity in certain infrastructure areas (e.g. road construction) which, if
sustained, would be positive.
On our reading, it is unlikely that the recent policy freeze will continue
indefinitely, as the government will be the biggest loser in that scenario.
Indeed, the government has finally mustered enough political courage
to announce the long overdue hike in local fuel prices. All eyes are on
the upcoming cabinet reshuffle by Prime Minister Manmohan Singh in
early July. A damp squib of a reshuffle will be disappointing.
The ongoing monsoon will be a key factor that will affect the nearterm growth trajectory. Recently, the local Met office slightly
lowered its guidance, and now expects the monsoon rains to be 95%
of the long-term average, down from its April forecast of 98% and
just short of the 96-104% range which counts as a “normal”
monsoon. The shortfall is not significant but the direction of the
change should not be ignored. Note that the amount and distribution
(both spatial and temporal) of monsoon rainfall matters for the final
impact on farm output.
We expect the current patch of growth moderation to reverse in FY13.
However, in the current quarterly round, we are marking down our
FY13 GDP growth forecast to 8%. The delayed impact of the ongoing
monetary tightening and the anticipated fiscal adjustment following the
recent hike in fuel prices will affect private consumption. Also, the
recent deceleration in investment will have a bigger impact than
previously thought.
Inflation remains uncomfortably high
Higher global commodity prices combined with strong domestic
demand have pushed up core WPI inflation. High inflation is partly also
driven by the government’s own initiatives to increase rural purchasing
power through higher minimum support prices for crops and social
initiatives such as employment guarantee schemes, which have
enhanced the demand for food.
Meanwhile, the Indian consumer, the poster-boy of the India growth story, began to shift away from gold and showed an increasing preference for diamond jewellery, the bastion of Gitanjali's product lines. As Indian consumer habits develop, brand-consciousness also improves. The branded jewellery market in India is yet nascent, with only a few strong national brands. Among these are Gitanjali's flagship Nakshatra, and its other well-known brands such as Gili, D'damas and Asmi. It also has gold jewellery lines and luxury watches such as Morelatto and Nina Ricci.