High oil prices, weakening rupee and a widening current account deficit are three known unknowns that could apply brakes on the broader economy's growth
Households are spending more. Goods are moving out of shop shelves with greater rapidity. Companies are borrowing more than 12 months ago.
After several months of rough and tumble when it had almost fallen off the cliff, the Indian economy appears poised to move into a faster lane, swiftly recovering from the twin policy shocks of demonetisation and goods and services tax (GST).
Automobile show rooms have been reporting brisk activity, implying greater spending ability and growing income levels.
In June, passenger vehicle (PV) sales grew at its fastest pace in a decade, with domestic sales of 2,73,759 units, up 37.5 percent over last year, latest data released by Society for Indian Automobile Manufacturers (SIAM), an association of automobile companies, showed.
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Most auto brands reported similar pattern in sales, implying the trend was more broad-based and industry-wide.
India’s largest car maker, Maruti Suzuki, reported a 36 percent jump in sales in June at 1,44,981 units. Tata Motors sold 56,773 vehicles last month, up 54 percent, year-on-year.
The Nikkei India Purchasing managers’ index for manufacturing — an indicator of industrial activity — rose sharply to 53.1 in June, the strongest since December 2017, supported by strong output and new orders in 2018.
The latest IHS Markit Business Outlook survey showed that private sector companies expect faster increases in new business, business revenues, capital expenditure and profitability in the year ahead.
“Sentiment surrounding new business and revenue expectations is at the highest level seen since October 2016, as survey respondents forecast further improvements in client demand and market conditions,” Aashna Dodhia, Economist at IHS Markit, said.
India’s stock markets have scaled new peaks, mirroring the optimism in the real economy. On Tuesday, the benchmark 30-share Bombay Stock Exchange (BSE) Sensex share index rose 106 points to close at 36,825 points. The National Stock Exchanges 50-share NSE Nifty advanced 49 points, settling at a record 11,134.
There are signs that factories could be beginning to add more capacities to meeting growing demand for their goods.
Non-food credit, banking parlance for loans given mainly to fund additional investment, is now growing at a fast clip. It grew 11 percent in May, according to latest Reserve Bank of India (RBI) data.
Since November 2017, non-food credit has grown at an average of 9.8 percent, showing heightened economic activity. It could well imply that plants have used up their spare capacity and with an eroding stockpile of unsold goods.
Contrast this with 18 months ago, when banks were awash with funds but corporates aren’t taking any.
Some experts, however, cautioned that the rebound may not be decidedly V-shaped and it may still be a few quarters away before Asia’s third largest economy hits a sweet spot.
The Index of Industrial Production (IIP), a gauge of factory output and the closest approximation to measuring economic activity in the country’s business landscape, slowed to 3,2 percent in May, a seven month low, mainly due to tepid growth in manufacturing.
According to Crisil, a credit rating and research firm and subsidiary of S&P Global, India will need a big lift through private investments and relentless implementation of reforms to achieve and maintain GDP growth of more than 8 percent over the next few years.
The Indian economy grew 7.7 percent in the last quarter of the previous financial year 2017-18, the fastest in nearly two years, signalling a quick turnaround aided by rapid construction activity, consumer spending and corporate investment. For the entire fiscal year 2017-18, the country grew at 6.7 percent.
The Asian Development Bank (ADB) has projected India’s GDP to grow at 7.3 percent in 2018-19 and 7.6 percent in 2019-20. The International Monetary Fund (IMF) estimates that India will grow 7.3 percent this year and 7.5 percent the following year.
These estimates are in line with the RBI’s 7.4 percent growth projection in 2018-19.
According to Devendra Pant, Chief Economist at India Ratings, India will continue to grow at 7-7.5 percent, but a growth, higher than this will require a sustained investment leg up.
“First two quarters of 2018-19 is expected to show good growth numbers, but mainly due to base affect. Growth in last two quarters’ could be relatively lower,” he said.
High oil prices, a weakening rupee and a widening current account deficit are three variables that could apply brakes on the broader economy.
“Inflation, current account deficit, and interest rates are growing pressure points,” said Dharmakirti Joshi, chief economist at CRISIL. "Rising exogenous risks include elevated crude oil prices, U.S. interest rates, and trade wars. At the same time, huge nonperforming assets limit the ability of public sector banks to finance growth.”
The Indian rupee touched its lowest ever, crossing 69 to a dollar mark, beaten by high crude oil prices, geo-political concerns and looming fears of a global trade war.
Crude oil prices have been in range of USD 70-80 per barrel from about USD 55 in October, 2017. A drop in drilling activity in the US and concerns over sanctions against Iran and production cuts by oil producing cartel Organization of Petroleum Exporting Countries (OPEC) have raised prices.
Merchandise trade deficit hit a five-year high to USD 16.6 billion in June due to higher net oil import bill, led by a weaker domestic currency. This is expected to put more pressure on the current account deficit (CAD) that has touched 1.9 percent of GDP in the quarter-ended March in 2017-18, but lower than 2.1 percent in the previous quarter, but much higher than 0.4 percent of GDP the year earlier.
Experts expect CAD to widen to a six-year high of USD 67-72 billion in the current financial year.
“The trend of a year-on-year rise in the current account deficit is likely to continue for the seventh consecutive quarter in April-June quarter, driven by higher commodity prices and demand for imports of machinery and electronic goods, amid a contraction in exports of readymade garments, gems and jewellery and iron ore,” Aditi Nayar, Principal Economist at ICRA, said.