Slowing inflation restrains India’s robust growth
This will pressure its central bank to lower interest rates going forward
MUMBAI: India’s economy is struggling to recover its strong growth record, beset by record low inflation, a widening output gap, and short-term uncertainty from the introduction of a uniform sales tax.
That will build pressure on the Reserve Bank of India to jettison its neutral monetary policy bias adopted just five months ago, setting the scene for lowering interest rates perhaps as early as next month, besides reminding yield-chasing investors that putting money in India is not without risks.
Any reduction in interest rates will be in contrast to what major central banks are trying to signal - a rise in borrowing costs - and could trip the Indian rupee which hit a 20-month high in April.
This would be bad news for a country that needs to attract billions of dollars in foreign investments to make up a shortfall in domestic capital.
Having already ceded the crown of the fastest growing major economy to China in the January-March quarter, India is “significantly under-performing compared to its potential now for quite some time,” according to Ravindra Dholakia, a member of India’s rate-setting committee and an economist at the country’s premier management institution. An arch-dove on the six-member panel, Dholakia voted for a 50 basis points cut at last month’s meeting.
Part of the reason is a self-inflicted goal in the form of a cash ban from which India is still recovering. And the combination of over-leveraged companies and banks struggling with the problem of bad loans means businesses are not borrowing to invest and banks are not lending much in Asia’s third-largest economy.
“The big problem is revival of investment and that is being held back because of the twin-balance sheet problem,” Vijay R Joshi, Emeritus Fellow of Merton College at University of Oxford and the author of the book India’s Long Road - The Search for Prosperity, said over the phone. He added it would take a long time for capital spending to recover as India goes about repairing the health of its banking system.
Bank credit to industry contracted by 2.1% in May from a year earlier, in contrast to an increase of 0.9% in May 2016, the RBI said on Friday.
Demand for loans from sectors like infrastructure, food processing, basic metal, metal products and textiles all contracted.
In the January-March quarter, India grew at 6.1% from a year ago, well below the average seen in the past five years when it expanded at 6.9%.
While that is still a robust rate in the western world, it is not good enough to help it provide employment to the millions joining the workforce every year. It doesn’t bode well for Prime Minister Narendra Modi’s government which is aware the economy needs to grow at double digits to generate jobs and keep social tensions at bay.
The US$2 trillion economy will expand 7.3% in fiscal year 2018, according to the June survey conducted by Bloomberg News.
Growth forecasts were lowered slightly for this year and next year when compared to a survey conducted in May. Amid slowing growth and a drop in food prices, economists also lowered their consumer price inflation forecasts for the 2018 and 2019 fiscal years to 4% and 4.75%, respectively, from 4.5% and 5% in May’s survey.
Meanwhile, the latest purchasing managers’ index for the manufacturing sector released on Monday showed growth slowing in June to 50.9 from 51.6 in May.
“India’s current growth rate is below potential,” said Kaushik Das, chief India economist at Deutsche Bank. “Growth is mainly supported by private consumption at this juncture with private investment remaining anemic due to the high leverage of the corporate sector and weak demand. In other words, the quality of growth is not optimal at this stage.”— Bloomberg