Arjen van Dijkhuizen, Sr. Economist at ABN AMRO, notes that last Friday, India’s real GDP growth in Q2-2018 was reported at 8.2% yoy, much better than consensus expectations (7.6%) and 0.5 %-point higher than in Q1.
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“The acceleration was driven by private consumption and exports, while government consumption slowed. Hence, Indian growth has proven resilient to headwinds from higher oil prices, escalating trade tensions and rising borrowing costs.”
“We have to add that the effects of the policy rate hikes have not been felt in Q2. Moreover, the strong growth in Q2 is also explained by base effects, given the trough seen one year earlier.”
“Looking at recent data, the picture is more mixed. Industrial production accelerated to a five-month high of 7.0% yoy in June, also reflecting base effects. The manufacturing PMI fell in recent months, to 51.7 in August.”
“The PMI export subindex has been remarkably firm (certainly compared with Asian peers), jumping to a six-month high of 53.9 in August. That is in line with our view that India is relatively shielded from the escalating trade tensions between the US and China, although India also has its own import tariff spat with the US.”
“As base effects will fade and the effects of tighter financial conditions set to kick in after Q2-18, we have kept our annual growth forecasts for FY 2018-19 and FY 2019-20 unchanged at 7.5% for now.”
“Still, we think that ‘upside risks’ to these forecasts have risen. All in all, we expect India to remain the fastest growing emerging giant, having outpaced China’s growth in Q2 by 1.5 %-point.”
“On the fiscal front, we expect the government to continue with its approach of gradual consolidation and reducing the budget deficit below 3.5% of GDP, although progress has stalled partly due to higher than expected oil prices and the rise in government bond yields stemming from the latest EM market turmoil. That said, the public debt ratio is on a downward trend reflecting India’s high growth rates, and is expected to fall to below 50% of GDP this year.”
“India has not been immune to the market turmoil affecting EMs. Higher oil prices have driven external deficits up, there is some fiscal slippage in the run-up to the 2019 elections and many structural challenges remain including in infrastructure development and strengthening the banking system. That said, from a fundamental macro perspective, the country is in much better shape than Turkey or Argentina. Hence, we do not expect India to face similar amounts of stress.”
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