Economy on recovery path, but 'the pace is slow'

The government’s current account deficit (CAD) fell to more than a four-year low and gross domestic product (GDP) grew at a rate higher than expected in the second quarter (Q2, July-September) of this fiscal. While fuller recovery is still some distance away, the economy is on track toward that goal, said economists.

“Recent data suggests that the economy may be on the path of recovery albeit the pace is slow.

We can call it sustainable recovery only when investments pick up,” said A Prasanna, chief economist at ICICI Securities Primary Dealership.

The Reserve Bank of India (RBI) on Monday unveiled CAD data. Usually, the central bank releases Q2 by December-end.

CAD fell to $5.2 billion or 1.2% of GDP in Q2, mainly on account of decline in gold imports and stronger exports, from 4.9% in Q1 and 5% in Q2 of last fiscal.

Imports fell by 4.8% as gold demand was curtailed to $3.9 billion from $16.4 billion with the help of various restrictions in Q1. On the other hand, exports jumped by 11.9%, led by growth in segments like textile, leather and chemicals. The trade deficit improved to $33.3 billion from $47.8 billion in Q2 of last fiscal.

The RBI said that net services exports also grew to $18.4 billion from $12.5 billion last year mainly on account of computer services. Gross transfer receipts showed an uptick of 2.6% at $17.3 billion. Inflows from non-resident Indians (NRIs) were also higher at $8.3 billion, up from $2.8 billion in Q2 of last fiscal.

However, fears of an early tapering of quantitative easing by the US Federal Reserve left their impact. While foreign direct investment or FDI recorded net inflows of $6.9 billion, there was an outflow of $6.6 billion in net portfolio investment with outflows from debt segment at $5.7 billion.

There was a draw-down of $10.4 billion from foreign exchange reserves in Q2, the RBI said.

Going forward, the CAD is expected to widen marginally but will stay manageable.

Nov PMI at 7-mo high
The country’s manufacturing activity picked up in November after a gap of three months. According to HSBC, the manufacturing Purchasing Managers’ Index (PMI) was at a seven-month high of 51.3 in November from 49.6 in the previous month. The PMI reading above 50 indicates expansion and below 50 means contraction. “Manufacturing operating conditions across India improved in November.,” said Leif Eskesen, chief economist for India and ASEAN at HSBC.

Growth despite risks?
“With a return to growth of incoming new work, leading companies to raise their production levels for the first time since April,” he said. He said that the purchasing activity also rose in the latest month and job creation was sustained. Data suggested that it was domestic demand that supported growth as export business increased at a marginal and slower rate.

Morgan Stanley hiked its GDP growth forecast for the current and upcoming fiscal years to 4.7% from 4.4% and 5.1% from 4.6% respectively. It attributed the upward revision to the delay in expected tapering of quantitative easing by the Fed, India’s effective curbs on gold imports,measures to attract foreign currency inflows and better-than-expected growth in exports and agri output.

In Q2, GDP grew 4.8%, up from the 4.4% growth in Q1, driven by the agriculture sector that grew 4.6%. “We believe the economy has finally bottomed and will continue to pick up speed from here, leading many to revise up their growth projections,” said Robert Prior-Wandesforde, head of ASEAN, India Economics, Credit Suisse, who expects GDP to grow at 5.4% this fiscal and 6.6% next fiscal. Higher inflation and chances of slippage in fiscal deficit, however, pose risks to growth.

“We see a meaningful risk that inflation stays elevated for longer due to well-entrenched inflation expectations,” said economists Chetan Ahya and Upasana Chachra at Morgan Stanley.

Higher inflation means higher interest rates. The CPI has been hovering around 10% since the past six months. This may prod the RBI to hike policy rates again.