Fastest growth in 10 quarters greets new India government

Post with image

India’s economy grew surprisingly strongly in the first quarter in a sign that growth has bottomed out and is now feasibly heading towards a higher, more sustainable rate as the Modi government, elected in May, takes on the reform challenges facing Asia’s third-largest economy.

In the first GDP report since the elections, the economy grew by 5.7% in the April-June quarter of the 2014-15 fiscal year, well ahead of the 4.6% of the previous quarter and marking the fastest pace of growth for the world’s 10th largest economy in 10 quarters.

The improvement in GDP was industry-led, with growth in the sector rebounding to 4.2% after contracting in the previous two quarters. This was thanks to strong export growth as well as a pickup in both investment (at 7%) and government spending (at 8.8%) since the May general election.

Agriculture growth was 3.8%, reflecting the healthy winter harvest. The services sector, which represents 58% of GDP, improved modestly but, at 6.8%, growth remained below expectations.

Private consumption remained flat at 5.6% YoY but fell from 8.2% on a quarterly basis, partly due to continuing high inflation. In the meantime, exports continued to play a key role, achieving double-digit growth, as external demand remained healthy and the Indian rupee (INR) stabilised.

graph

Growth revival underway

In the short term, industrial activity momentum may slow, as the sharp rebound in Q1 FY 2014-15 was partly due to late monsoons, which enabled construction and mining activities to continue for longer in the quarter. Meanwhile, below-average monsoons may weigh both on agriculture and on rural incomes, which could ultimately hit domestic consumption.

Weaker agricultural production may also maintain pressure on inflation, spurring the Reserve Bank of India to keep policy rates high for longer in pursuing its disinflationary glide path, which targets inflation of 8% by January 2015 and 6% by January 2016.

The new government, led by Narendra Modi, recently marked its first 100 days in office and appears determined to meet its ambitious fiscal deficit target of 4.1% of GDP by the end of the current fiscal year.

 Short-term challenges remain

Thus, spending cuts later in the year look likely, given that slightly over 60% of the fiscal deficit target has already been used in the first four months. Fiscal and monetary policies may thus not directly support growth in the coming quarters, which could result in a short-term moderation.

But the inflation-targeting policy should help lay the foundations for solid growth in the medium to long term. As inflation cools, real incomes should improve, boosting domestic consumption, encouraging higher investment and ultimately leading to a virtuous growth cycle.

Critical to guiding India towards a higher, more sustainable growth rate in the next few years will be the new government’s ability to maintain the pace of reforms, support the revival in capital expenditure and improve project execution.

 

 
[starbox id=anand.shah] [starbox id=paul.milon]

Anand Shah

Chief Investment Officer at BNP Paribas Mutual Fund – India

Leave a reply

Your email adress will not be published. Required fields are marked*