India Economy - December 2015

Source: OPEC 1/3/2016, Location: Asia

India’s GDP growth accelerated to 7.4% y-o-y in 3Q15 from 7.0% in 2Q15 and compared to 8.4% in the same quarter last year. Improving investment demand and manufacturing activity boosted India's real GDP growth y-o-y during the second quarter of fiscal year 2015, July–September, up from 7.0% y-o-y in the first fiscal quarter. The new GDP figures accordingly prompted the Reserve Bank of India (RBI) to keep its monetary policy unchanged. On the negative side, weakness in external demand and weak rural growth will likely further limit the recovery this year. Fixed investment, albeit set to benefit from public spending, may also face a crunch given that private investment continues to struggle.

On the demand side, both exports and imports showed yet another quarter of contraction, in both nominal and real terms. Real exports have remained negative for five consecutive quarters, suggesting that the current episode of weakness in exports is more severe than during the global financial crisis of 2008–09. Its geographic spread is also much wider, with weak demand registered across nearly all of India's export markets, including Northeast and Southeast Asia, South Asia and the Middle East, in addition to the US and EU markets. India’s monthly trade deficit narrowed further in October to $9.8 billion from $10.5 billion in September, which was below expectations.

On the supply side, performance has improved, compared with the previous quarter. The most positive development was the strong performance of the manufacturing sector, which showed the highest quarterly growth in three years. This is consistent with the monthly manufacturing output data for the July–September quarter but does not represent the most recent trends, which seem to point to another loss of momentum. Recent GDP figures are unlikely to change the central bank's strategy. With growth remaining in line with the RBI's forecast, and with inflation also following the RBI's projected path, the central bank left its monetary policy unchanged during its most recent meeting. Notably, in its policy statement, the RBI mentioned that less than half of the cumulative policy repo rate reduction of 125 basis points in 2015 has been transmitted by banks and that even though space for further policy easing remains, it would instead work on addressing the transmission mechanisms for banks before further cutting rates.

The wholesale price index (WPI) in India registered its first sequential increase in five months in October, rising 0.6% m-o-m on a seasonally adjusted basis. This was underpinned by firmer food and oil prices. As anticipated, unfavourable base effects drove India's retail inflation further towards the central bank's January 2016 target of 6%. The largest increase was observed in food prices, with food inflation accelerating by a full percentage point in y-o-y to 5.3%. Fuel and transportation components, all strongly driven by oil prices, also proved more resilient in October, with transport deflation narrowing to 0.4% y-o-y, and with fuel and light inflation remaining unchanged at 5.3% y-o-y. On a m-o-m basis, CPI remained stable, particularly given typically stronger pressures on retail prices during the Indian autumnal holiday season. Even at a four-month high, India's CPI inflation is nearly half the average rate observed in the past five years. Also, it seems the October increase in inflation and the November excise-duty increase have both reaffirmed expectations that the RBI may now refrain from further actions for some time.

Import weakness (excluding gold) rather than a pick-up in exports led the narrowing trade balance. However, exports were not as weak as the 17.5% y-o-y contraction in October would suggest. As indicated before, much of the drop in export values is a result of lower oil and commodity prices. Gold imports were valued at $2 billion in October, even lower than what the market expected. Imports (excluding oil and gold) declined 0.9% m-o-m on a seasonally adjusted basis, after a steep 4.4% increase in September. More generally, however, imports (excluding oil and gold) have been firming over the last few months, consistent with a cyclical recovery in consumption on the back of India’s sharp oil price driven terms-of-trade increase.

Industrial production growth averaged 4.7% y-o-y in 3Q15 compared with 3.1% y-o-y in 2Q15. Within this, manufacturing output growth accelerated to 4.5% y-o-y from 3.6% in 2Q15, while mining sector growth picked up to 2.9% from 0.2%. It seems service sector output reflects the strength in both financial and trade-related services. Aggregate real deposits and credit growth registered 14.8% y-o-y in 3Q15 accelerating from 12% in 2Q15. These should support a pick-up in financial services activity. A key positive message from the GDP data is that it indicates improving momentum in fixed investment, accompanied by sustained manufacturing growth. However, muted private consumption growth and persistent weakness in exports have kept overall aggregate demand below its potential, while risks to any further recovery remain.

November’s PMI data points to tepid manufacturing growth across India, with gloomy domestic demand resulting in the weakest expansion in production in 25 months. Signs of the sector slowing have been building up, as growth in both new orders and output have eased in each of the past four months. This disappointing news was accompanied by a stagnant labour market in the sector. More precisely, the intermediate goods sub-sector has driven the deceleration in growth. In addition, new business inflows and output in this category fell for the first time since December 2013. While investment in producer goods saw a rebound in November, the consumer goods sector continued to be a bright spot.

Weak inflationary pressures together with a slowdown in growth support further repo rate cuts. Falling for the fourth consecutive survey period to a 25-month low of 50.3 in November, compared with an October reading of 50.7, the seasonally adjusted PMI highlighted a marginal improvement in business conditions across the sector. Subsector data highlighted consumer goods as the best performing category, while operating conditions at intermediate goods companies deteriorated for the first time since December 2013.

The GDP growth expectation for 2015 was adjusted from 7.4% to 7.3% and kept unchanged at 7.6% for 2016.

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