The pressure on public finances has reduced as a result of lower oil prices easing the government’s fuel subsidy bill. In addition, the improved credibility of the authorities’ macro policy over the last year has given the government the scope to relax its budget deficit targets; lowering the deficit to 3% of GDP has been postponed by one year to 2017-18. The deficit targets now stand at 3.9% for 2015-16, 3.5% for 2016-17 and 3% for 2017-18. Based on the government’s projections, this should give them an extra $11 billion to be spent on infrastructure. Given the heavy indebtedness of the corporate sector, increasing the government’s capital spending to address supply side bottlenecks is a sensible approach.
India’s current account deficit narrowed to $8.2 billion (1.6% of GDP) in the 4Q14 from $10.1 billion (2% of GDP) in the 3Q. This decline was mainly due to a solid increase in the balance of invisibles (service net exports, remittances and investment income), even as the trade deficit widened slightly. Regarding goods trade, the value of oil imports fell sharply on lower crude prices, which was partially offset by an increase in gold imports as well as a pickup in non-oil, non-gold import growth to 7.8% in the 4Q14 y-o-y from 7% in the 3Q. As a consequence of the downward surprise in the 4Q14 account deficit, the deficit for the 2015 fiscal year (FY15) in now tracking at about 1% of GDP, down from the 1.3% of GDP that was previously envisioned.
This budget confirms that slow and steady progress is being made on economic reforms. The government has also successfully passed three important ordinances on insurance, mining and coal, into law. However, the key test for the government remains the reform of the Land Acquisition Act. As such, the forecast remains unchanged for 2015 at 7.5%. The acceleration of the GDP growth rate (market price) from 7.2% in 2014 to 7.5% in 2015 was driven by low crude oil and products prices, which make up 40% of India’s’ total imports. This has led to the import bill being significantly lower, helping to narrow the current account deficit which also has eased inflation. Monetary easing and improved consumer confidence are other main drivers. In addition, there was an increased emphasis on infrastructure, with a pledge to raise public and private investment in the railway and power sectors as well as incentives to boost investment through initiatives such as tax-free infrastructure bonds. Some important tax measures were also introduced.
The RBI issued the central government’s borrowing programme for the first half of FY16 in March 2015. The government is scheduled to borrow 60% of the total FY16 gross requirement (Rs 6 trillion) in the first half of FY16, in line with market expectations and similar to the borrowing in the first half of FY15.
The annual inflation rate on the WPI measure was -2.1% y-o-y in February, with core manufacturing prices up just 0.2%. The continuous decline in India's WPI inflation is not all good news for the economy. Although on one hand, the lower fuel and power prices still indicate falling input costs for Indian producers, weakening manufacturing product inflation is also a sign of continued weakness in aggregate demand. Meanwhile, uncomfortably high food inflation is also a concern as it may signal rising price pressures in the coming months. Although CPI inflation edged up to 5.4% y-o-y (driven by food prices) from 5.2% y-o-y in January, it is expected to remain below 6% y-o-y, the RBI’s inflation target for January 2016 throughout this year. Lower inflation will improve consumers’ purchasing power and encourage spending.
India’s industrial production grew 2.6% y-o-y in January, while December's reading was sharply revised upward to 3.2% y-o-y from the previously reported 1.7%. However, the manufacturing recovery appears to be proceeding quicker than expected as newly released January data and sharply upward-revised December data show manufacturing growth above 3% y-o-y for the third consecutive month. The source of manufacturing strength is also heartening as it comes from a stronger off-take of capital goods, a sign of strengthening investment demand. On a negative note, consumer goods output still remains weak, having slipped into contraction again in January after tentative signs of recovery in the previous month. Despite lower inflation and improving consumer sentiment, Indian households remain wary of making new purchases, particularly in rural India, hurt by the weak agricultural harvest last season.
March PMI data pointed to an overall improvement in manufacturing operating conditions across India. A stronger increase in new orders led firms to boost production levels and raise buying activity. The manufacturing PMI increased from 51.2 in February to 52.1 in March, highlighting further improvement in the health of India’s manufacturing economy. Output rose for the seventeenth consecutive month in March and at a solid pace that was faster than in February. Momentum is mounting in manufacturing as the sector begins to build up a head of steam. Stronger expansions of output, new orders and stocks of purchases all contributed to a higher PMI reading in March.