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27
February 2019
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India's economy (The Total Investment & Insurance Solutions)
India's economy appeared to be losing
momentum in the approach to a general election that must be held by May, as a
Reuters survey of economists forecast that growth slipped to 6.9 percent
annually in the October-December quarter. If the forecast proves accurate,
India will post its slowest growth in five quarters, making it harder for Prime
Minister Party to persuade voters that government policies were delivering
economic success. The gross domestic product and the second advance estimates
for the 2018/19 fiscal year ending in March will be released on Thursday around
1200 GMT. Weaker domestic and external demand were key factors behind the
economists expectations of sub-7 percent growth. India would still be growing
faster than China's 6.4 percent growth in the same quarter, but its economy has
decelerated from the more than two-year high of 8.2 percent growth posted in
the April-June quarter.
The current growth numbers may look
respectable, but Modi faces a criticism that he has not done enough for the
manufacturing sector and create enough jobs for millions of youth entering the
jobs market every month. Growing signs of weakness in India, most alarmingly
the desperation of rural communities whose income have been hit by falling
prices for farm produce, forced Modi earlier this month to increase state
spending, and make direct cash transfers to farmers. That could marginally help
growth rates, but it will increase the government's debt.
This month, the Reserve Bank of India (RBI)
cut its policy interest rate by 25 basis points to 6.25 percent, and changed
its stance to "neutral" to boost a slowing economy as inflation has
come down sharply. "The economic growth slowed in December quarter
following weaker consumption as reflected by auto sales and slowdown in credit
after a crisis in non-banking financial company sector," A. Prasanna,
chief economist at ICICI Securities Primary Dealership in Mumbai said. Prasanna
said economic growth in December quarter could fall to as low as 6.4 percent.
Economic growth could suffer from a possible slowdown in state spending in the
two months before the election.
But, Prasanna and other analysts still
expected a pick up in coming quarters due to rising private investments and
consumer demand, helped by lower interest rates and a fall in global oil prices.
Average industrial capacity utilisation during the four quarters that ended in
September 2018 was about 74.5 per cent although the new orders growth has
moderated, according to the RBI estimates released earlier this month.
Year-on-year growth in the industrial output in November and December 2018 were
low at 0.3 per cent and 2.4 per cent, compared to the average growth of 5.7 per
cent in the preceding seven months of
2018-19.
The country has underperformed in the
manufacturing sector - though emerging as the world's sixth biggest auto
manufacturer, and expanding production of smart phones. Manufacturing's share
of GDP has risen just 1.5 percent in last three years to stand at nearly 18
percent, and investors complain that higher taxes, lack of efficient
infrastructure and regulatory red tape make India a difficult place to work.
Inflows of foreign direct investment has slowed, dropping 7 percent to $33.5
billion in the nine months between April and December 2018, reflecting
investors concerns that Modi's business-friendly government faced a tough
contest and whoever wins the election could have a hard time pressing forward
with needed reforms. "The government needs to focus on addressing issues
related to land, labour tax, the policy regime related to infrastructure, and
overall ease of doing business," Upasana Chachra, an economist at Morgan
Stanley said in a note earlier this week. The Total Investment & Insurance Solutions
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