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16 Jan 2014
India’s Growth Prospects for 2014
Beleaguered by sluggish GDP growth, persistent inflation and a hostile external environment 2013 proved to be a challenging year for India. The latest statistics do look promising though - measured at factor cost, India’s GDP grew by a higher-than expected 4.83% year-on-year (YoY) in the quarter ended September 2013, a slight acceleration from the lacklustre 4.35% in the previous quarter. Despite only a slight improvement, growth in the quarter was impressive given the economic uncertainties plaguing the country during that period. The recovery is much more evident when measured in terms of GDP measured at market prices - which suggests that the economy grew by 5.65% YoY, the fastest pace in almost two years, during the quarter ended September 2013. This has boosted optimism that the long-awaited economic turnaround is underway.
The recent narrowing of India’s current account deficit (CAD) is likewise reassuring. The CAD narrowed to 1.22% of GDP during the quarter ended September 2013, largely on account of a lower merchandise trade deficit. Merchandise exports expanded by a robust 11.95% YoY during the period while merchandise imports shrunk by 4.83% due to tax hikes and quotas limiting gold imports (import of bullion has previously imposed a massive strain on India’s balance of payments). This represents a significant improvement from the 4.86% CAD observed during the preceding quarter and the 6.54% CAD recorded at its recent peak during December 2012. In addition, the central bank’s Foreign Currency Non-Residential Scheme (FCNR (B)), essentially a concessional dollar-swap window, has raised foreign deposits to replenish the country’s foreign exchange reserves. This, together with the improved CAD position, has put India in a better position to withstand external shocks.
India Premium Database
+ National Accounts |
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+ Gross Domestic Product |
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+ Table IN.AA004: Gross Domestic Product by Expenditure and Income: Constant Price |
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+ Balance of Payments |
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+ Balance of Payments |
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+ Table IN.JBA001: Balance of Payments: BPM6: INR |
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However, stubbornly high inflation, especially in the context of relatively tepid economic growth, poses a conundrum for the central bank, and is a major downside risk to the economic outlook. Driven by surging prices of food items, the wholesale price index (WPI), the preferred indicator for measuring inflation in India, reached a 14-month high of 7.52% YoY in November. The consumer price inflation rate also remained in the double-digit region throughout much of 2013. The new RBI governor Raghuram Rajan has made inflation management his first priority during his tenure. However, given that the recent episodes of skyrocketing inflation were arguably consequences of supply-side constraints, it is questionable if India’s inflation woes can be resolved effectively through monetary policies rather than broad structural reforms.
The deteriorating fiscal situation raises further concerns about India’s economic health. With the fiscal deficit widening to INR 5.096 trillion in November 2013, reaching 94% of the full-year budgeted level of INR 5.425 trillion during the first eight months of the current fiscal year to March 2014, there is little room for manoeuvre. The government has set a budget deficit target of 4.8% of GDP for the fiscal year 2013-14.
Recent developments in the global economy, most noticeably, tentative recovery in US and UK, will hopefully help India’s nascent recovery gain momentum. Indeed, the recovery of the economy, if realised, will bring some leeway for policymakers to tackle the downside risks. However, it remains less than certain if this would be sufficient to steer India away from its present economic trends. The general election which is only four months away adds an extra dose of uncertainty to near-term economic prospects.
Contributed by Yan Ting Hin, CEIC Analyst
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