Initiating India Investment Index (Beta)

Gross capital formation accounts for over 32% of India’s GDP, making it one of the key components of the Indian economy. In line with Orbis Economics’s practice of developing alternative quantitative measures to get a better understanding of the Indian economy, the beta version of the India Investment Index (Triple I) has been constructed, which is a single point indicator for a monthly perspective on the latest trends in capital formation. It is a weighted average of a host of economic indicators with strong explanatory power for GCF, available on both a non-seasonally adjusted as well as seasonally adjusted basis.

For regular readers of the India Macro Weekly, which covers our other two proprietary indices – the Exchange Rate Index and the Consumer Conditions Measure – the India Investment Index is constructed along the same principles. A value above 100 indicates that investment activity is on the upturn compared to that during the last one year and a value less than 100 indicates that investment activity has declined compared to the last one year. A value of 100 indicates that investment activity is static.

The latest numbers for the Triple I, for April 2017, show a divergence between the trends for the non-seasonally adjusted (nsa) and seasonally adjusted (sa) series. While Triple I, nsa, is at 96.3, a sharp decline compared to the 112.5 level during March 2017, the seasonally adjusted Triple I allows less room for disappointment as it has increased to 104.2 from 99.1 during the previous month. This indicates, that the decline is on account of seasonal factors than underlying weakness. The former series, though, remains significant since the quarterly GCF print is on an nsa basis. 

India investment index
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Economist's art on Modi's India

Unlike Modi covers in the past, which show his photographs, the latest Economist cover story on the PM has a a very interesting illustration. A careful look at it reveals much. 
For one, PM Modi has a distinct air of former PM Singh. From the tired expression to the relatively slight physique. Given the challenges that India presents at any point of time, it is perhaps unsurprising that the Economist detected something of Singh weariness in Modi. Barring of course, the possibility that their information was not updated for India PM and half way through illustrating they realised - oh damn, different guy! Unlikely, but a fun thought.

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.