India: Slowing economic growth - NAB

The Indian economy expanded by 5.7% yoy in the June quarter, the slowest since March 2014, notes the research team at NAB.

Key Quotes

“Net exports detracted from growth, and capital spending remained muted. NAB Economics is forecasting the economy to grow by 6.8% and 7.4% in 2017 and 2018 respectively, as implementation issues surrounding the GST begin to recede. The ability to generate an enduring improvement in private capital expenditure remains a crucial challenge for the Indian economy.”

“The Indian economy decelerated in the June quarter, growing by 5.7% yoy, the lowest since March 2014, and weaker than the 6.1% in March. Uncertainties surrounding the GST (which came into effect on 1st of July), as well as a weak export performance were the principal reasons for this weak outcome. The performance in the June quarter was even more disappointing when one considers that the base effects turned more favourable this quarter. The 5.7% yoy growth in the June quarter follows a 7.9% expansion in June quarter, 2016. By contrast, March quarter’s 6.1% increase followed from a stronger 9.1% in March quarter, 2016.”

“In terms of components, consumption was the most significant, contributing 5.5%. However, the share of consumption has been steadily falling over the last few quarters. Investment spending made a very modest positive contribution, 0.5%, an improvement from the -0.6% contraction in the March, but still indicative of a weak investment climate. Valuables were the second biggest positive contributor (2.4%). However, the weakest component was net exports, which detracted -2.6% from growth.”

“By sector, the slowdown was driven by weakness in industry. Overall, industry GVA grew by a restrained 1.6%. The mining sector contracted ( -0.7%), while manufacturing decelerated sharply to 1.2%: down from 5.3% in the March quarter. It appears that the slowdown in manufacturing has been impacted by uncertainties regarding the GST.”

“On a more positive note, there was an uptick in services. The services sector expanded by 8.7%, its quickest since June 2016. Within this segment, the performance of the trade, hotels, transport and communications was the best overall, expanding by 11.1% (6.5% in the March quarter). This outcome reflects, in part, the infusion of cash into the system following remonetisation, as well as strong growth from international tourism arrivals during the April-June period.”

“Outlook

NAB Economics is forecasting a 6.8% outcome in calendar 2017, rising to 7.4% in 2017 and 7.6% in 2018. Inflationary pressures remain muted, allowing Indian corporates the benefit of a lower interest rate regime. Further, the problematic issues relating to GST implementation should recede over time, and India is likely to reap some of the benefits of a single market that the GST regime provides. Finally, progress by the RBI and Finance Ministry to address some of the legacy problems related to stressed assets should also provide support. In this regard, ratings agency Moody’s has assigned a stable outlook for the Indian banking sector. A challenge for the Indian economy relates to generating a sustainable improvement in private investment spending.”