India: Economy loses steam in the October to December period
February 8, 2016
India’s economy slowed in the third quarter of fiscal year 2015, as doubts continue to linger over the direction of growth. GDP growth fell from the second quarter’s revised 7.7% (previously reported: +7.4% year-on-year) to 7.3% over the same period of the previous year. While the result was just below FocusEconomics panelists’ projections of a 7.5% expansion, this still represents remarkably-strong economic performance. Most emerging market countries have struggled in recent months, but India has been able to buck this trend, thanks largely to the country’s resilient domestic demand and limited reliance on the external sector for growth.
Q3’s slowdown was driven by weaker fixed investment growth, which eased to over-one-year low. Fixed investment slowed from Q2’s 7.6% expansion to a notably weaker 2.8% increase, likely reflecting tighter financial conditions and lackluster external demand. In contrast, private consumption picked up from Q2’s 5.6% growth to 6.4% in Q3 and government consumption rose to 4.7% (Q2: +4.4%). Private consumption has benefited from tailwinds from slowing inflation, which more than offset headwinds on rural consumption from a below-average monsoon.
On the external side, net exports contributed positively to growth in Q3 after dragging on the economy in the previous period. The low-commodity-price environment, which has caused the value of oil imports to plummet, drove falling imports to outpace shrinking exports. Imports dropped 10.8% in Q3—a much more pronounced decline than Q2’s 3.4% fall—while exports contracted 9.4% (Q2: -4.3%). The sharp drop in exports reflects sluggish global demand, which has depressed trade volumes in the region.
Even though one year has passed since the Ministry of Statistics and Programme Implementation (MOSPI) significantly revised their methodology for calculating GDP and the historical data series, market analysts continue to have doubts about the reliability of the new series. Sonal Varma, economist at Nomura explains:
“Taken at face value, […] data suggest that India’s growth cycle has accelerated in FY16, driven primarily by rising private consumption demand and steady public investment growth. However, there remains a disconnect between GDP and real data. For example, 12.6% manufacturing growth in Q4 2015 is not consistent with current low production/capacity utilisation in manufacturing sector. It is true that GVA captures value additions and could be getting a boost from lower input costs (higher profitability), but the rise in manufacturing value added appears too high. In our view, the low deflators in specific sectors – for example negative deflators in manufacturing and services – may be exaggerating the real growth numbers.”
For the full fiscal year 2015, the government estimates that the economy will expand 7.6%. If confirmed, this will mark an acceleration from the 7.2% increase recorded in fiscal year 2014.