Indian growth figures surprises on
downside By Robert M Cutler
MONTREAL - The headline figures from
India's release of economic data shocked observers
as the country's economic growth in the
January-March period fell to 5.3% year-on-year,
the lowest rate of expansion in nine years and
almost a full percentage point below the consensus
estimate established by a Bloomberg News survey.
Growth was down from 6.1% in the fourth quarter of
last year.
Searchers for a silver lining
to the dark cloud can point to report from DBS
Bank's Daily Breakfast Spread that sequential
growth (ie from one quarter to the next) for the
January-March period this year was above the last
quarter of 2011, and comfortably up from the
"mere" 3-4% of the last six months of 2011.
The implication is that growth has
accelerated since last year, when the economy
would have bottomed out. However, "sequential
growth in the last three quarters has averaged a mere
4.5%," which is "much
weaker than the headline year-on-year growth"
suggests.
A report by the Asian
Development Bank (ADB) enumerated the factors in
the downdraft: a tight monetary policy to restrain
persistently high inflation, continuing weakness
in the global economy including its financial
aspects, an increased budget deficit arising from
larger subsidies, and a "lack of political
consensus on resolving the policy impediments to
growth".
Gross domestic product (GDP) for
the 2011 fiscal year, which in India runs from
April 2011 through March 2012, rose 6.5%, down
from the 8.4% growth rate during 2010-11. The
consensus growth currently expected for the 12
months to next March is 7.3%. Foreign observers,
including but not limited to the ADB, anticipate
recovery to be led by investment, and in
particular by increased capital expenditure under
the government's new five-year economic plan,
since the still high rate of inflation makes the
cost of capital more difficult for the private
sector.
Although inflation is down from
the 9-10% annual rate in the last quarter of 2011,
the cost of living continues to be a political and
economic headache. It had accounted to a
significant degree for the ruling Congress party's
poor election results earlier this year, when it
lost in state assembly contests in Goa, northern
Punjab and Uttar Pradesh.
Last month, the
commerce ministry announced that headline
inflation (Wholesale Price Index) had risen to
7.2% year-on-year in April from 6.9% year-on-year
in March, following an upward revision of the
February figure to 7.4%. Together with the
economic slowdown, this persistent level of
inflation complicates the task of the Reserve Bank
of India (RBI), which cannot cut interest rates so
easily, and also gives rise to fears of
stagflation.
The HSBC/Markit manufacturing
Purchasing Managers' Index (PMI) nevertheless
continues to show good expansion, falling only to
54.8 in May from 54.9 in April. Any figure above
50 signals growth, any figure below signals
contraction. Still, the current PMI level has
fallen from 56.6 in February and 57.5 in January.
The extremely sensitive juncture of the
Indian stock market requires some comment. The
bellwether BSE Sensex equity index touched 15,750
shortly after the open on Monday before bouncing
slightly. The number is only about 300 points
above the lowest major support of the post-crisis
(that is, since 2009) trading range.
In an
extremely ominous development, the index failed to
break back through a descending-tops resistance
trendline dating back to November 2010. It had
broken out to the upside in early February but
fell back below in the first half of May. On May
29 it touched that resistance from the downside
and then continued to fall. That reconfirms the
trendline as a strong resistance: it had already
been traced by six major touchpoints, including an
early March bounce from the upside.
The
Nifty index has not yet confirmed that structure.
Indeed, it shows an opposite indication, having
confirmed the downtrend at the end of May as a
support from the upside rather than as a
resistance from the downside. However, that is
because the Nifty is valued in the local currency,
which has fallen 20% against the dollar in the
last 12 months. At the end of last week, the rupee
fell to a record low of 56.515 to the US dollar
before recovering slightly.
Dr
Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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