India Macro Weekly: Real economy improves, FM supports multilateralism

 For the fortnight ended May 6, 2017:

  • It was surprisingly quiet fortnight on the India data front, with only two major data points having been released: Sectoral deployment of credit and Core industry growth. Both indicators show relatively healthy trends.
  • Credit growth stood at 7.4% in March 2017, still soft compared to the corresponding period of the previous year but improved from the previous months. A sharp spike in credit to the services sector buoyed growth, while personal loans’ growth continued to be strong as well.
  • Core industries’ growth came in at its sharpest in 3 months of 5% in March 2017. Five of the 8 segments showed positive growth, while the remaining 3 showed a decline in output from the corresponding month of the previous year.
  • At the Plenary Meeting of the Development Committee of the World Bank and the IMF, the Finance Minister, Arun Jaitley, called for a bigger and better bank. He touched upon the need for increased commitments from the group, a more representative share of developing countries in the group and India’s need for support on turning the demographic advantage into a true dividend.
  • The latest numbers for the Orbis Economics Exchange Rate Index showed that despite some neutralisation in base to 2016-17 in the new financial year (2017-18), the GBP still remains the most depreciated major currency against the INR.

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India Macro Weekly: Liquidity drives RBI's monetary policy

For the week ending April 8, 2017:

  • RBI’s first monetary policy for 2017-2018 was the highlight event. While the central bank kept the policy repo rate unchanged at 6.25%, signaling no change to systemic lending rates; it did increase the reverse repo rate to 6%. In line with the liquidity overhang in the system, the increase in reverse repo rate will further assist in sucking out excess liquidity from the system, at least partly brought on by the demonetisation drive.
  • The central bank also released a slew of survey results, which gave more bad news than good. Capacity utilisation declined in Q3, FY17 from the previous quarter, indicating a continuing slackness in demand, which does not bode well for India’s investment cycle. Even though this was partly explained by a drawing down in inventories, the increase in raw material to sales ratio does not indicate a robust demand future either.
  • Consumer confidence delivered a shocker, with the current situation index actually falling into pessimistic territory and future expectations also declining quite a bit. Consumers expect both overall economic conditions and price levels to be unfavourable to them in the future.
  • However, businesses are feeling somewhat more positive, with an improvement in business expectations on account of overall conditions.
  • The Macro Meter rating remained unchanged as consumer and business confidence switched ratings. 

India’s investment cycle is going nowhere

Yesterday’s Financial Times carried an interesting data chart comparing the proportion of gross capital formation to GDP. China, unsurprisingly, was top of the chart with ~45% capital formation to GDP ratio. India came next as a standalone country, a proportion of over 30%. While the focus of the data commentary was on the fact that UK lags behind the European average (though, both the UK and Europe have sub-20% proportions) and emerging economies were a reference point only; the question on how far India can the still maintain robust capital formation to GDP ratio is an important one for India watchers.

In Q1, 2011-12 (the start period of the new national accounts data series for India) GCF/GDP ratio stood at 40.3%, and by Q3, 2016-17 (the latest data point available), the ratio has declined to 32.4% i.e a decline of almost 8 percentage points. While part of this decline can be explained in terms of faster growth in consumption expenditure, which grew by a particularly strong 11.4% as per the latest data, that is hardly the only explanation. Capital formation shrunk in 8 of the 19 quarters for which data is available, indicating that the slack in India’s investment cycle is for real. 

India Macro Weekly: Core industry, credit remain weak, external debt in check

For the week ended April 1, 2017:

  • On the activity front the week continued to be disappointing as core output growth fell to the lowest in 15 months of 1%, in February 2017. 
  • Credit growth also declined to a low of 3% during the month, on account of poor offtake by the industrial sector, even though credit ex-industry continued to grow at a relatively robust pace. 
  • The external sector debt report for Q3, 2016-17 showed a slight decline the absolute value of debt, as well as a slight change in debt composition in favour of short-term debt and a move away from long-term debt. Debt ratios stayed stable and healthy as per the latest reading. 
  • The Orbis Economics Exchange Rate Index for 2016-17 showed a sharp appreciation in the rupee against the GBP compared to 2015-16 levels, on account of broad based depreciation in the latter with the Brexit underway. However, the rupee was somewhat depreciated against both the USD and EUR during the year. In March 2017 alone, however, the rupee gained substantially against all major currencies. 
  • The Macro Meter rating remained unchanged, on account of status quo on broad trends in net FPI inflows, credit and deposit growth.  

Data trends that defined 2016-17

The year 2016-17 is now over, making way for a brand new financial year. Here is a look at the top 10 macro data trends that defined the year.
  1. Demonetisation drives growth debate: The highlight growth number for 2016-17 was the one for Q3, given that demonetization took place during the quarter. Growth in gross value added (GVA) at basic prices indeed slowed down to 6.6% in Q3, 2016-17, the slowest in 7 quarters.  
  2. Industry falls deeper into darkness: IIP growth flatlined – growing by only 0.6% for the April-January period of 2016-17, far worse than the already small 2.4% average growth in 2015-16. The continued industrial slowdown continues to be the one real pain in the Indian economy’s flesh, with agriculture and services showing no sustained signs of slowdown.
  3. Little surprise, capacity utilisation refuses to pick up substantially: Closely related to industrial production is the question of the investment cycle pickup, which will not happen till capacity utilisation levels improve. At present they remain around the 70% mark.
  4. But, foreign trade provides some positive momentum: The external economy started turning around during the second half 2016-17, with both exports and imports turning positive. Average growth up to February 2017 has now actually turned positive, though the same cannot be said for imports. The good news with respect to the latter, though is, that non-oil imports have now turned around suggesting the return of demand appetite domestically.
  5. As do long-term foreign investments: While FPI inflows have gyrated far more during the course of the year, FDI inflow have continued to be rock solid, in what could be another year of record FDI inflows, at almost USD 7bn as per our projections.
  6. Consumer inflation gives a breather: Consumer price inflation fell below 4% during the latter part of the year, giving some breathing room from constant policy attention to the critical number. However, core inflation has been strong.  
  7. But WPI says, that vigilance is still required: Further, inflation based on WPI has shot up significantly in the recent months, ringing alarm bells with it. The sharp increase in WPI indicates that it is only a matter of time before high inflation gets passed on to CPI.
  8. Leaving limited interest rate room to boost credit growth: This is unfortunate at a time when credit growth is very limited, dragged down by industrial credit growth in particular, which is the largest component of overall credit growth.
  9. Indian companies’ external borrowings also remain very limited: External borrowings are well below even the levels seen up to February 2016, indicating that there is limited appetite among Indian borrowers, which is in line with slow credit growth domestically as well. 
  10. Consumer conditions remain healthy: Our proprietary OE Consumer Conditions Measure indicates better conditions for the Indian consumer in 2016-17 compared to the previous year, which is also reflected in high growth in private final consumption expenditure, high growth in personal credit growth and also consumer sentiment.