Following a further round of drastic revisions, India's real GDP growth was pegged at 7.3% year on year (y/y) in the December 2015 quarter, down from an upwardly revised 7.7% in the September quarter and 7.6% in the June quarter. Despite visibly slowing momentum, the upward revisions bring the full-year advance estimate to 7.6%, making India the most resilient large emerging economy.
IHS perspective | |
Significance | India's GDP grew by 7.3% y/y in the third quarter of the 2015/16 financial year, according to advance estimates released by the Central Statistics Office. While broadly in line with IHS forecasts for the third fiscal quarter, real growth for the first half of 2015/16 was sharply revised upwards, bringing the government's full-year advance estimate to 7.6%, well above our forecast of 7.2% and the government's own previous forecast range of 7–7.5%. |
Implications | The new GDP series introduced one year ago appears to be increasingly disconnected from the high-frequency indicators – such as the purchasing managers index (PMI), core industrial output, and price data – which all showed downward trends throughout the year. If official GDP data are to be trusted, domestic household and government spending, as well as a strong recovery in manufacturing output, drove growth during the December quarter. However, even the optimistic official figures failed to mask slowing momentum in domestic investment activity and a deep dive in exports. |
Outlook | The government's advance estimate of 7.6% growth for the year ending March 2016 will be challenging to meet, as this implies that the January–March-quarter growth will reach 7.8%. Given forward-looking indicators of investment and production, full-year growth is unlikely to exceed 7.5%. The outlook for fiscal year 2016/17 is also looking increasingly challenging: with no quick turnaround in private investment and exports in sight, public investment and consumption will remain the drivers of growth but may not be sufficient to push the rate of growth beyond 7.5%. |
Investment and exports remain a drag on growth
Despite the upward revisions to the first half of the fiscal year (FY) ending March 2016, India's December-quarter data (which correspond to India's third fiscal quarter) clearly indicate a loss of momentum in the second half of the year, with a sharp slow-down in fixed investment activity undoubtedly the driver of this trend. According to new data, real fixed-investment growth more than halved during the December quarter, slowing to 2.8% year on year (y/y) from the previous quarter's 7.6%. An increasingly difficult external environment – reflected in crumbling demand and falling prices of commodities and many manufactured goods, as well as heightened financial volatility and large capital outflows from emerging markets – has dampened investor confidence. Domestically, Indian factories continued to see falling capacity utilisation, while companies and banks have struggled to deleverage their balance sheets. With factories operating at 30% below capacity, appetite for investment remains weak. The unfavourable external outlook, together with the recent decline in new investments, suggests that the weakness in private investment will likely persist during 2016. The onus of reviving the investment cycle under such circumstances therefore remains on the government, whose capital-expenditure plans will undergo scrutiny in the upcoming 2016/17 budget to be announced later this month.
Meanwhile, the weakness in foreign trade deepened during the third fiscal quarter of 2015. The real-exports contraction has been the most severe since the global financial crisis of 2008–09. However, with real imports falling even further, the net-exports contribution to growth was positive.
India's real GDP and components, market prices (y/y, % change) | |||||||
| Q4 2015 | Q3 2015 | Q2 2015 | FY2014 | FY2015E | FY2016F | Nominal share (FY2014) |
GDP, total | 7.3 | 7.7 | 7.6 | 7.2 | 7.6 | 7.6 | 100.0 |
Private consumption | 6.4 | 5.6 | 6.4 | 6.2 | 7.6 | 7.5 | 59.8 |
Public consumption | 4.7 | 4.3 | 1.0 | 12.8 | 3.3 | 8.5 | 10.7 |
Fixed investment | 2.8 | 7.6 | 5.2 | 4.9 | 5.3 | 5.1 | 29.4 |
Exports | -9.4 | -4.3 | -5.8 | 1.7 | -6.3 | 8.1 | 19.7 |
Imports | -10.8 | -3.4 | -5.0 | 0.8 | -6.3 | 5.0 | 22.3 |
Source: Central Statistical Organization (India), non-seasonally adjusted | |||||||
Consumer spending improves but remains uneven
From a positive perspective, consumer spending underwent a recovery during the December quarter, up 6.4% y/y from 5.6% y/y in the previous quarter. The boost likely stemmed from spending during India's festival season in October and November 2015 – while the slight acceleration in retail inflation during the quarter was well below historical levels, supporting the real incomes of Indian households. However, aggregate consumer-spending data do not account for the full picture: a number of high-frequency indicators – such as vehicle sales and consumer-goods sales in rural areas – continue to indicate a large gap between urban and rural spending. The latter, hit hard by poor harvests and reduced government subsidies in 2015, continues to trail the former. Nonetheless, total private spending remains robust and will likely continue to be the driver of growth, reducing India's vulnerability to external headwinds. The newly released Reserve Bank of India (RBI) consumer-confidence survey also shows a marginal improvement in the future expectations index, reflecting positive consumer perceptions on future economic conditions, income, and employment.
Weak agricultural output holds back supply-side growth, manufacturing surprisingly strong
Supply-side GDP data have displayed a somewhat surprising trend. After accounting for taxes and subsidies, supply-side real GDP grew 7.1% y/y during the December quarter, the full-year growth projected by the government at 7.3%. In this respect, all sectors except agriculture showed stronger expansion, with the manufacturing sector up 12.6% y/y in real terms, the mining sector up 6.5% y/y, and the construction sector up 4.0% y/y. This is at odds with most of the high-frequency indicators that persistently show weakening momentum in India's industrial growth. The manufacturing purchasing managers index (PMI) weakened to a three-year low in December 2015, sliding into contraction. Infrastructure-sector growth has also been weak, with cement production in particular remaining stagnant, which indicates weak construction activity. Other indicators, such as corporate order books, inventory ratios, and factory capacity utilisation, all point to slowing momentum in manufacturing, marking a puzzling contrast with the reported double-digit growth in that sector. Services growth, in addition, appears to outpace the speed of expansion in the lead indicators, such as railway freight growth and services PMI.
India's real GDP and components, supply side (y/y, % change) | ||||||
| Q4 2015 | Q3 2015 | Q2 2015 | FY2014 | FY2015E | Nominal share (FY2014) |
Gross value added, total | 7.1 | 7.5 | 7.2 | 7.1 | 7.3 | 100.0 |
Agriculture | -1.0 | 2.0 | 1.6 | -0.2 | 1.1 | 17.6 |
Manufacturing | 12.6 | 9.0 | 7.3 | 5.5 | 9.5 | 16.8 |
Mining and quarrying | 6.5 | 5.0 | 8.6 | 10.8 | 6.9 | 2.5 |
Electricity, gas, water supply, and other utilities | 6.0 | 7.5 | 4.0 | 8.0 | 5.9 | 2.4 |
Construction | 4.0 | 1.2 | 6.0 | 4.4 | 3.7 | 8.0 |
Trade, hotels, transport, and communication | 10.1 | 8.1 | 10.5 | 9.8 | 9.5 | 21.4 |
Financial, real estate, and professional services | 9.9 | 11.6 | 9.3 | 10.6 | 10.3 | 16.6 |
Public administration, defence, and other services | 7.5 | 7.1 | 6.1 | 10.7 | 6.9 | N/A |
Source: Central Statistical Organization (India), non-seasonally adjusted | ||||||
Outlook and implications
India's GDP data has been under scrutiny since the introduction of a new series in February 2015, which instantly transformed the country into one of the fastest-growing large economies (see India: 10 February 2015: GDP rebasing paints brighter domestic story for Indian economy in 2014 and 2015). The third-quarter release fails to ease these doubts, as even the country's chief central banker, Raghuram Rajan, has repeatedly questioned the headline figures and has increasingly relied upon alternative indicators of growth – such as vehicle sales, railway freight, energy consumption, and others – to devise monetary policy. Our own range of critical indicators puts India's growth closer to 6%, which is more in line with the previous GDP series prior to the February 2015 revision.
However, the official figures put India's annual growth at an estimated 7.6% for FY 2015 (ending March 2016). Even taking into account newly revised first and second fiscal-quarter growth, this forecast stretches credibility, implying that the Indian economy will grow 7.8% during the January–March quarter. With forward-looking indicators of investment and production remaining weak, this rate of growth is unlikely. The government's ability to provide additional fiscal stimulus to the economy during the fourth fiscal quarter is also limited, considering its evident difficulties in remaining within the stipulated budget-deficit target – particularly in light of weak nominal GDP growth. Average growth of 7.5% for the year would therefore be a more likely outcome, using the current official data for the first three quarters.
Meanwhile, the outlook for FY 2016/17 is looking increasingly difficult. With no quick turnaround in private investment and exports in sight, public investment and consumption will remain the primary drivers of growth. With the Indian government expecting to raise public-sector wages (which would support consumer demand) and maintain its ambitious infrastructure plans, the new budget to be announced later this month is critical for the 2016 growth outlook. However, under tight spending controls, the government's fiscal stimulus may not be sufficient to push India's growth beyond 7.5% in FY 2016/17 in the increasingly uncertain external environment.