Group Economics Emerging Markets
India Watch
Arjen van Dijkhuizen, +31 20 628 8052
Jewel in the crown again?
28 April 2015 With growth expected at 7.5%, India will surpass China as fastest-growing emerging giant this year. However, in terms of development, India lags behind its bigger Asian neighbor. This also illustrates India’s catch-up potential, certainly if the country continues to push through reforms. Looking at the reform progress made by PM Modi’s government, one year after its convincing victory, the glass is half full in our view. Meanwhile, external risks have fallen since the tapering tantrum in 2013, when India was classified as one of the fragile five. Despite these improvements, India remains vulnerable to turns in market sentiment, for instance triggered by a faster-than-expected Fed exit, while stalling reforms would pose another risk. Jewel in the crown again? During the British Raj (1858-1947), India was often referred to as ‘Jewel in the Crown’, as Britain had cheap access to the country’s natural resources. Nowadays, India looks to be an Asian crown jewel once more, at least in terms of economic growth. As explained in last month’s Asia outlook India makes up for China slowdown, GDP methodology revisions in midFebruary lifted (estimated) growth rates in recent and coming years by 1.5 – 2 %-points. For 2015 and 2016 we now expect India to grow by 7.5%. Hence, already this year India will surpass China (where growth gradually slows to an estimated 7% in 2015-16) as fastest growing emerging giant.
certainly if it continues to push through reforms. Favourable demographics also support India’s growth potential.
… but is still much less richer GDP per capita, USD (nominal)
8000 6000 4000 2000
India now grows faster than China … 0
Real GDP, % yoy
95
14
00
05 India
10
15
China
12 Source: EIU
10 8 6 4 2 06
07
08
09
10 India
11
12
13
14
15
China
Source: Bloomberg NB: Since Q2-2012, Indian GDP growth data based on new methodology
India still lags China in terms of development
Growth rates also supported by politics and oil windfalls Post-election dynamism leading to an improved momentum for growth and oil windfalls have also supported growth. Based on the new GDP methodology, annual growth jumped to a 3.5 year high of 8.2% yoy in Q3-2014, driven by a surge in private consumption. In Q4, growth slowed somewhat as private consumption cooled and exports contracted further, but at 7.5% remained relatively high by recent standards. Investment remains quite subdued, despite government efforts to boost infrastructure investment. Still, industrial production accelerated recently to 5% yoy in February, supported by rising growth in the manufacturing sector.
Still, China’s development has progressed to a more advanced state than India’s. Between 1995 and 2014, China’s GDP per capita (in nominal USD terms) increased more than tenfold, whereas India’s GDP/capita quadrupled. In 2014, China’s GDP/capita was four times that of India. Moreover, poverty is still a bigger problem in India, as around 30% of the population lives below the (national) poverty line versus 13% in China. WHO data show that life expectancy at birth is 65 years in India versus 76 in China. India’s literacy rate is 74% versus 95% in China. These differences in development stage also illustrate that there are catch-up gains in sight for India,
Business confidence is improving The development of the forward looking PMIs show that business sentiment has improved since mid-2013. Although the Manufacturing PMI has fallen a bit compared to the threeyear high of 54.5 reached last December 2014, at 52.1 the index still is at healthy levels. What is more, the Services PMI has climbed from below the neutral 50 mark since Q3-2013 (average 46.7) to an average of 53.1 in Q1 2015. As a result, the composite PMI has fluctuated around a decent 53.5 in recent months, up from below 50 levels one year earlier.
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India Watch, Jewel in the crown again? – xx April 2015
5% % of GDP in 20 012 to 1.3% of GDP in 2014. This was drive en by y monetary tigh htening, gold im mport restriction ns and the sha arp drrop in oil prices s. More recentlyy, the trade deficit has widened as s exports are contracting and gold imports are a rising as im mport restriction ns have been re relaxed. The cu urrent account de eficit is expecte ed to remain arround 1.5% of GDP, as a ch heaper oil bill will w help to conttain imports. Moreover, the on ngoing rise of FX F reserves – w which now cov ver around 6 months of imporrts and short-teerm external de ebt threefold – has further mitigated external finanncing risks.
Bu usiness confiidence on an n improving trrend ind dex
6 65 6 60 5 55 5 50 4 45 4 40
Current C accou unt has impro oved since 20 012 06
07
08
09
Manufactuuring PMI
10 0
11
Seervices PMI
12
13
14
1 15
Composite PMI
Sou urce: Thomson Re euters Datastream m
odi-governmen nt has initiated d several refo orms Mo In its first year in o office, PM Mod di’s governmen nt has made ogress with refo orms, as it has improved labo or legislation an nd pro has s laid the found dation for comp plex tax and su ubsidy reforms and d for reforming and opening up u state monop polies. Moreove er, steps have been ttaken regarding fiscal consolidation, such a as eamlining regio onal finances. Still, S progress in several key stre (se ensitive) areas ssuch as land re eform is less im mpressive. ogress with refo orms is sometimes blocked by b the complex Pro federal model of India. The BJP P lacks a majoriity in the Senatte, which has a say o over key areas such as land reform. r Moreer, state govern nments still pla ay an importantt role. The lightt ove reg gional election ccalendar this year y could help paving the wa ay for further reformss. Still, although it remains to be seen ether existing rreform plans will w indeed be im mplemented, th he whe currrent governme ent is the most business friend dly, growthorie ented in years and its mandate to introduce reforms remaiins quite strong. In th hat sense, the glass g is half full in our view. BI maintains its s easing bias RB Falling commodityy prices have contributed c to inflation droppi ng from m around 10% yoy in late 201 13 to around 5% yoy currentl y. We e expect inflatio on to fall from 7.2% 7 in 2014 to o 6% in 2015, rem maining within tthe RBI target of 6% per early y 2016. The RB BI is to o be praised fo or its prudent policies p since mid-2013, m makin ng India less vulnera able to market turmoil. t The RB BI’s two 25 bp rate e cuts in Janua ary and March (to 7.5%) were e expected, alth hough the timin ng of the moves – made in intterim meetingss – was s surprising. Sttill, Indian bankks have not been keen to passsthro ough lower rate es on to lenderrs so far, with credit c growth rem maining quite w weak. In its regu ular April meeting, the RBI stayed on hold bu ut kept its easin ng bias. We see some room ffor e or two additio onal rate cuts in n 2015, but – to o quote govern nor one Rajjan – further ea asing will be “cconditioned by incoming data””. n has improve ed Extternal position India’s external po osition has clea arly improved compared c to sev veral years ago o. The current account a deficit has fallen from m
USD U bn
25 0 -25 -50 -75 -100 -125 -150 -175 00
2 02
04
0 06
08
Oil importts Current acccount balance
10
12
14
Preciouus metals importss
So ources: EIU, Thom mson Reuters Dataastream
n conclusion In India’s vulnerabilities have falleen compared to o the tapering h tantrum in 2013. The momentuum for reforms and the growth ou utlook have imp proved, while tthe external position is strong ger. Alll this is illustrated by externa l rating developments. The th hree major rating age encies have keppt India at the lowest l investm ment &P and Fitch had a negative grrade since 2007. Whereas S& ou utlook in early 2013 2 their outloook is stable now, while Moody’s re ecently changed d its outlook too positive. Still, as India stays de ependent on fo oreign funding tto cover extern nal deficits, it re emains sensitive to shifts in m market sentimen nt, for instance e stemming from a faster-than-exxpected Fed exit. A stalling of o eforms would pose a related rrisk. Hence, keeping reforms on re tra ack is key for In ndia to becomee Asia’s crown jewel once mo ore. Ke ey forecasts forr the economy of o India 2 2012
2013
20 014e
2015e
20 016e
GD DP (% yoy)
5.1
6.4
7.2
7.5
7.5
CP PI inflation (% yoy y)
9.7
10.1
7.2
6.0
5.5
-4.9
-4.5
-4.0
-4.0
-4.0
52
51
50
49
47
Cu urrent account (% GDP)
-5.0
-2.6
-1.5
-1.5
-2.0
Grross fixed investm ment (% GDP)
3 31.4
29.7
2 27.9
26.2
2 26.7
Grross national saviings (% GDP)
2 29.1
29.6
2 29.7
27.8
2 27.4
US SD/INR (eop)
5 54.8
61.9
6 63.3
64.0
6 65.0
EU UR/INR (eop)
7 71.1
85.3
8 81.1
60.8
7 71.5
Bu udget balance (% GDP) Go overnment debt (% % GDP)
Bu udget b alance, cu urrent acc. for 2014 4,2015 and 2016 are rounded figurres
So ource: EIU, ABN N AMRO Group Economics E
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India Watch, Jewel in the crown again? – xx April 2015
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