Download A Slower First Quarter May Not Be What It Seems

India
Recent Inflation Trends Precariously Near RBI’s Target
Source: Bloomberg, UOB Global Economic & Markets Research
A Slower First Quarter
May Not Be What It Seems
India’s Apr-Jun (FY 1Q 2016) GDP grew
7.1% y/y, a slower pace from the 7.9% y/y
rate in the earlier quarter. This is also the
slowest rate of growth in five quarters, and
probably dents the prospects of hitting the
8% growth target for FY 2016. However,
another measurement of economic activity,
gross value added1 (GVA), showed that
India’s economy expanded 7.3% y/y in FY
1Q 2016, slightly slower from a 7.4% y/y
growth in the previous quarter.
Looking at GVA growth is more important
especially since it implies that government
subsidies grew substantially in the AprJun period. This is not uncommon during
a new budget year where there usually is
a wave of government spending. Indeed,
there had been subsidy allocation to food,
petroleum and fertilizer in the reporting
quarter.
On the expenditure side of growth
accounting (GDP), the predominant factor
was a larger-than-expected slowdown in
private consumption, where it grew 6.7%
y/y, down from an 8.3% y/y growth rate
in the previous quarter. What was more
worrying was that investment contracted
for a 2nd consecutive quarter as it fell
3.1% y/y in FY 1Q, at a faster rate than
the 1.9% y/y rate a quarter ago. As such,
the slowing growth in the two significant
engines (comprising 87% of GDP) of
India’s economy dragged on overall
GDP even though exports (+3.2% y/y)
surprised with the first positive growth in
five quarters.
% y/y
18
16
14
12
10
8
6
4
2
0
2004
2005
2006
2007
2008
2009
2010
2011
CPI
real estate/professional services (22% of
GVA) sector as well as a 12.3% y/y gain
in public spending (13% of GVA). That
said, the agricultural sector (15% of GVA)
only expanded 1.8% y/y as past two years
of poor monsoon caused a dent in farm
production. Going forward, the good news
is that the June-September monsoon
in 2016 had achieved 97% of the long
run average rainfall and should boost
upcoming farm output, as well as private
consumption in India’s rural areas.
The Indian government is now banking
that a better monsoon season, as well
as the implementation of wage hikes for
public officers may spillover positively to
stronger GDP growth in the next three
financial quarters.
On the supply side of the national
accounts (GVA), the manufacturing sector
(17% of GVA) achieved strong growth of
9.1% y/y, and suggested that the “Make In
India” initiative is making some headway.
Additionally, the services sector (53%
of GVA) expanded 9.6% y/y, due in part
to a 9.4% y/y increase in the financial/
2012
2013
2014
32
Quarterly Global Outlook 4Q2016
UOB Global Economics & Markets Research
2016
Higher Inflation Expectations
Remain A Key Concern In 2016
The Reserve Bank of India (RBI) had
maintained status quo in their 9 August
policy meeting, and the latest inflation
in August (5.05% y/y, from 6.07% y/y a
month earlier) may provide further easing
space for the RBI’s new governor Urjit
Patel. Part of the reason for the slower
inflation was lower food prices, after a
return of the southwest monsoon. Going
forward, however, the rise in global
commodity prices and implementation of
wage hikes for public officers over the next
few months can result in higher inflation
expectations. As such, we think that the
RBI would maintain the current repo rates
at 6.5% unchanged until 1Q 2017, where
the central bank may likely hike rates by
25bps then. For now, our expectations
of a stronger USD from the US interest
rates normalization (a 25bps rate hike in
December 2016) will likely see the USD/
INR trading towards higher grounds
and end at 68.9/USD by end 2016.
UOB Economic Projections
1 GVA = GDP minus net indirect taxes, and net
indirect taxes = gross indirect taxes minus subsidies.
2015
RBI CPI Target
2014 2015 2016F 2017F
GDP
6.6
7.2
7.4
7.7
CPI (average, y/y %)
6.4
5.9
5.0
5.3
Current account (% of GDP)
-1.4
-1.1
-1.0
-1.2
Fiscal balance (FY, % of GDP) -4.3
-3.5
-3.7
-3.5