GDP growth accelerated to 5.7% y-o-y in the 2Q, the fastest growth in 10 quarters from 4.6% in the 1Q. This outcome was in line with expectations. The sustainability of the pick-up in growth depends on whether it was driven by business cycle dynamics, as reflected by industrial and private services growth, or strong agriculture and government spending growth, which is unlikely to be sustained. Worth noting on the supply-side was a modest expansion in mining, which has also been in a prolonged recession, having contracted in nine of the previous 11 quarters. Insurance, real estate and business services recorded the 13th consecutive quarter of double-digit growth, clearly a pocket of strength. In fact, in an indication of how India's economy is changing, this sector now accounts for more than 18% of GDP, on a par with agriculture. On the demand-side, private consumption growth eased to 5.6% in April-June. Some mild deceleration in consumption had been anticipated given elevated inflation, so this deceleration is not entirely worrisome. It appears, in fact, to be a more sustainable pace – closer to typical levels – neither as buoyant as the 8.2% rate seen in January-March nor as lethargic as the 2.8% expansion of the previous two quarters. One positive side effect of weaker private consumption was that overall demand for imports remained weak, with real imports contracting on an annual basis for the third consecutive quarter. Against the 11.5% y-o-y expansion in real exports – its fourth consecutive double-digit gain - India's net trade position has improved considerably.
India's merchandise trade deficit (not seasonally adjusted) widened to $12.2 billion in July, up from June's $11.7 billion. This was still 2% below last year's reading, according to data released by the Commerce and Industry Ministry. Merchandise exports stood at $27.7 billion, with growth softening slightly to 7.3% y-o-y from doubledigit figures seen in the previous two months. Merchandise imports, on the other hand, continued to recover and stood at $40 billion, up 4.3% y-o-y. India's inflation rate remains the highest among Asia's major emerging markets. After having slowed sharply between April and June 2014, the rate of consumer price inflation accelerated to 7.9% y-o-y in July, dampening hopes that prices move to more reasonable levels. Until inflation moderates to more manageable and sustainable levels, economic growth in India is likely to remain below par owing to the distortions wrought by an unstable price environment. India's wholesale price index (WPI) inflation eased marginally in July, but the sharp rise in retail inflation released earlier this week suggests that the odds that the Reserve Bank of India (RBI) will cut benchmark interest rates in the coming months remain low. The headline WPI inflation stood at 5.2% y-o-y in July, down from 5.4% in the previous month. This was the lowest wholesale inflation reading in five months.
The seasonally adjusted PMI dipped slightly from July’s 17-month high of 53.0 to 52.4 in August. Nonetheless, the reading was consistent with a solid improvement in operating conditions. Output and new orders slowed slightly in August but remained robust relative to their 12-month history. Among the monitored sub-sectors, the best performing was consumer goods, while business conditions deteriorated in the capital goods category.
Indian manufacturing activity grew at its quickest pace in 17 months in July as order books swelled. This marked the ninth consecutive month of expansion according to the PMI. India's manufacturing growth contracted 0.8% during the fiscal year ending March 2013. Reduced imports has helped correct current account imbalances in recent quarters, and there were tentative signs of recovery in manufacturing activity during the last three months. Going forward, even as import growth accelerates further, healthy exports should keep the current account deficit under 2.5% of GDP in both 2014 and 2015, and provide much-needed support to the overall economic recovery.
Growth expectations remain unchanged at 5.5% in 2014 and 5.8% in 2015. It also seems underlying problems in the domestic economy will continue to restrict India’s GDP growth as the country continues to struggle with ongoing problems such as high inflation, relatively tight monetary policy, high corporate debt and non-flexible fiscal policy. Furthermore, despite making progress in cutting the twin deficits, the Indian economy remains vulnerable to capital outflows stemming from domestic and external shocks such as tighter monetary policy in the US.