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Overview of the Indian Economy

Eight years after the global financial meltdown, the world economic recovery still remains fragile. The slowdown in China has aggravated the cooling-off of the growth momentum of the some emerging countries with ramifications spreading out to the other parts of the world as well. In the midst, while India was touted as the bright spot on world economic growth map, the wheels of economic recovery, which was much anticipated to have started rolling on by the year, seems to have pulled the brakes on various fronts. Data emanating from various economic indicators points towards subdued growth and rising inflation. Given the drought and low water reservoir levels in various states, the agriculture output critically hinges on a normal and spatial distribution of monsoon. The foods prices remain elevated and headline WPI inflation has also turned positive in the month of April 2016. While there are rising apprehension of global oil prices to remain higher than the last year level, the inflation trajectory in India during the year will largely depend on the overall food production and the general demand scenario.

“Animal spirits” in the industrial sector remains low. With low capacity utilization rate, new orders received by the manufacturing sector in FY16 remained low as compared to the peak levels observed in 2013-14 (RBI OBICUS survey). A similar trend was also witnessed in the ‘Business Optimism Index’ survey (industry and services sector) done by Dun & Bradstreet. This also indicates slow recovery in the investment demand, unless the government expenditure gets rolling, especially in the areas it had promised during the budget. The manufacturing growth is beleaguered by bleak exports, poor demand (more so in the rural sectors), high borrowing cost, and projects stuck at various levels. Exports have encountered a consecutive 17 month of contraction. However, the flow of funds remains weak not only due to the weak credit off-take by the industry but also due to the overall state of the banking sector and rising risk aversion. The Indian banking system is struggling to come out from the significantly high non-performing assets, which is even expected to increase during the year.

The only ray of hope for the sustained revival of the Indian economy would arise from the strong inertia from the government on the execution of reforms and expenditure on infrastructure. Though termed as incremental efforts, the government has transformed the global investors’ perceptions about India. FDI limit has been liberalized in many sectors. FDI rose to a record in 2015 since 2009. Deregulation of fuel prices, auctioning off coal and telecommunications licenses in an open and transparent way, creation of a real estate regulator, redrawing its treaty with Mauritius, passage of the Bankruptcy and Insolvency law and increase in productivity in the parliament only paves the way for the execution of more aggressive reforms in the year ahead.

Key Highlights

Real Sector

• Growth in Index of Industrial Production moderated to mere 0.1% (y-o-y) during Mar-16 as against 2.0% during Feb-16.
• Growth in industrial activity was dragged down by decline in activity of mining and manufacturing sectors. IIP for mining and manufacturing sectors contracted by 0.1% and 1.2% respectively during Mar-16.
• Electricity sector, on the other hand, clocked a significant growth of 11.3% during Mar-16, providing some support to the overall IIP growth.
• During FY16, growth in IIP moderated to 2.4% from 2.8% in the previous fiscal.

Price Scenario

• WPI registered a growth of 0.3% (y-o-y) in Apr-16, after declining consistently for 17 months since Nov- 14.
• The rise in WPI inflation was mainly due to surge in prices of food articles. During Apr-16, inflation in food articles rose to 4.2% as against 3.7% in the previous month.
• CPI inflation surged to 5.4% during Apr-16 as against 4.8% in Mar-16. CPI inflation in rural and urban areas also soared to 6.1% and 4.7% respectively in Apr-16.

Money & Finance

• The aggregate deposit and bank credit grew by 9.3% (y-o-y) and 9.2% (y-oy) respectively in the week ended Apr 29, 2016 as against a growth of 11.6% and 10.0% in the year-ago period.
• During FY16, deployment of bank credit to services (9.1%), personal loans (19.4%) and priority sector (10.7%) increased as against a growth of 5.7%, 15.5% and 9.9% respectively during FY15, whereas deployment to the agriculture remained flat at around 15.0% during the same period.

External Sector

• India’s exports and imports declined by 6.7% (y-o-y) and 23.1% (y-o-y) to around US$ 20.6 bn and US$ 25.4 bn respectively during Apr-16 leading to a moderate trade deficit of US$ 4.8 bn.
• Non-oil imports declined by 22.8% to around US$19.8 bn during Apr-16, whereas oil imports declined by 24.0% to around US$ 5.7 bn.
• External Commercial Borrowings (ECB)/ Foreign Currency Convertible Bonds (FCCB) stood at around US$ 24.4 bn during FY16, registering decline for the second year in a row to 14.1% on a y-o-y basis.
• FII invested at around US$ 2.2 bn during Apr-16 as against an inflow of around US$ 3.0 bn in Mar-16.

Source: The entire section has been reproduced from May 2016 edition of Dun & Bradstreet Economy Observer.