India Economy in March 2015

India’s Central Statistics Office (CSO) has overhauled the country’s national accounts series. Although now the data produced should be more comprehensive than before, as well as closer to the methodology used by other countries, the changes have led to revisions, which have produced a surprising increase in the estimated GDP growth rates for recent quarters. GDP growth at market prices (rather than being based on factor costs) was revised up from 5% to 6.9% in 2014 and was reported to be 7.5% y-o-y in 4Q14, compared to 8.2% in 3Q. According to the new numbers, the GDP growth rate for 2014 has been revised to 7.2% from 5.2%. Also, the expectation for 2015 has been revised up to 7.5% instead of 6.1%, based on the new methodology.

Despite the official claims that the recent re-basing should improve the accuracy of India's GDP data reporting and bring it closer to international standards, the revised figures have raised some concerns, since they completely change the view of the Indian economy over the past two years. Unlike the earlier view, the revised figures indicate that the economic slowdown that started in 2012 did not continue in 2014. In fact, the economy showed a strong "V-shaped" recovery, improving substantially during the year to reach a respectable rate of growth of slightly below 7% in 2013. This view is inconsistent with other macroeconomic indicators that painted a much gloomier picture of the past two years. It was previously believed that the slowdown in the Indian economy was driven by a sharp deceleration in domestic demand, with investment spending bearing the brunt of a slowdown. But the revised figures show real fixed investment contracting only in 2013 and then improving marginally in 2014. In addition, the rapid expansion in growth and investment suggested by the revised figures typically would be also accompanied by a strong growth in imports – which has not been seen. The upwardly revised figures for investment and manufacturing growth are also puzzling, since they presumably capture a greater share of the economy. The acceleration in production and investment would require additional financing.

Prices across non-food articles continued to slide for the fourth straight month, driven by a sharp decline in fuel and power prices. However, food inflation jumped to a sixmonth high of 8% y-o-y in January, while primary articles inflation also experienced an uptick. Manufactured goods inflation, often used in India as a gauge of core inflation, also moderated for a sixth straight month, partially reflecting the easing costs of raw materials and energy but also pointing to still weak domestic demand. The news comes after the figures released last week showed India's industrial output in December easing again to 2.1% y-o-y.

India’s consumer price index (CPI) increased slightly from 119.5 in January to 119.7 in February 2015. The recent agreement between the Ministry of Finance and the Reserve Bank of India (RBI) calls for a 4% (±2%) inflation target. Amid concerns that such a target would limit its ability to continue with its current policy easing, the RBI clarified that it was only a medium-term target and that it would seek to bring down CPI inflation to the midpoint of the band (4%) by the end of a two-year period starting in 2016 (i.e. three years from now). Therefore, the target is unlikely to have any bearing on the near-term easing cycle.

The RBI cut the repo rate again in March by 25 basis points (bp) to 7.5% from 7.75%. It seems budget reforms, cutting subsidies, inflation targeting, the revised GDP figures under the new methodology, a strong rupee and downward inflation trajectory have led the RBI to cut the repo rate. Given low capacity utilisation and still-weak indicators of production and credit off-take, it may be appropriate for the RBI to be pre-emptive in its policy actions and utilise any available space for monetary accommodation.

In February, the manufacturing PMI declined for a second successive month and dropped 1.7 bp to 51.2, the lowest reading in five months. Both the output and new orders indexes fell by 2.8 bp and 2.5 bp, respectively. Meanwhile, the input price index declined for the third consecutive month, falling from 50.3 to 49.3.

In terms of India’s budget, the second budget of the BJP-led Indian government that came to power in May 2014 contains dozens of proposals that should boost economic growth and make it easier to do business in India, focusing on tax rationalisation and infrastructure investment. Although short on significant reforms, the budget was convincing enough to please investors, businesses and consumers alike. Still, the government's ambitions had to be balanced with the need to remain on a fiscal consolidation path. Although this may not stimulate growth, it is necessary to improve India's long-term financial health and maintain its favourable credit status. Therefore, the revised fiscal deficit target for the current fiscal year ending 31 March was left unchanged at 4.1% of GDP, with the government planning to offset the anticipated revenue shortfall with greater spending cuts (total expenditure during the 2014 financial year is estimated at INR 16.8 trillion ($271.4 billion), 6.3% below the budgeted amount.

The new budget introduced a number of tax changes in an attempt to revive business investment. Among the most important initiatives is the government’s renewed commitment to replace myriad complicated indirect taxes with the harmonised General Sales Tax (GST) by April 2016. The introduction of the GST could potentially boost the country's GDP growth by an additional 2% by creating a common market, according to government projections. The budget proposal raised the revenue share of the states in union taxes to 42%, a jump from the earlier recommended level of 32%. As anticipated, the BJP's new budget outlined an ambitious plan to upgrade India's poor infrastructure, with INR 700 billion alone (nearly $11 billion) to be spent in 2015 on roads, railways, ports and other projects.

The budget seems to have provided a boost to infrastructure building, though it has slowed the pace of fiscal consolidation. Specifically, the deficit for the 2016 financial year is now pegged at 3.9% of GDP, versus the previous fiscal road map target of 3.6%. The government has reaffirmed its commitment to a 3% deficit target – but one year later than in the previous road map. Apart from increasing capital expenditures on infrastructure and providing a slew of off-budget infrastructure incentives, the budget also pushed institutional design by formalizing the monetary policy framework and announced the creation of a modern bankruptcy law, as well as a dispute resolution mechanism and a public debt management office. If the tax revenue assumptions don’t materialize, or asset sales don’t go through, or oil prices rise, the infrastructure capex increase would be at risk.