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Capital Markets

India: not the shining beacon for growth

Despite emerging markets being heralded as the place for sustainable growth and a flight to safety, reports and statistics reveal that India isn’t the golden goose that keeps on giving.

We’ve all read the reams of reports from investment banks and trading houses that emerging markets are the beacon for sustainable growth and will provide sufficient enough buoyancy for the world economy and stop it falling over the sovereign debt precipice.

We heard over the last year or so about how resilient India will be, how it will provide sustainable growth over 2012 and soaring predictions that India’s economic growth rate would be up to 10% in the next year.

But the tides have started to turn on these over-enthusiastic estimates – statistics reveal that the Indian economy expanded by its slowest pace in more than two years:

- Gross domestic product in India expanded 6.9% in the third quarter of 2011 over the previous quarter.

- From 2000 until 2011, India's average quarterly GDP growth was 7.45%, reaching an historical high of 11.80% in December of 2003 and a record low of 1.60% in December of 2002.

Source: India Central Statistical Orga

In fact, Indian GDP growth rate has been sinking steadily:

India GDP growth rate
Percent change in gross domestic product 
January 2007 - December 2011
Source:, India Central Statistical Organization 

The decline is largely blamed on high local borrowing costs, a knock-on effect from the deepening eurozone crisis and a broad-based slump in mining, capital goods and volatile industrial production.

Recent industrial output numbers via Reuters reveal today: 

India - Oct Industrial output falls 5.1% y/y vs. expected -0.5% y/y
Source: Reuters

Interestingly, today Bloomberg reveals that India’s largest lender, State Bank of India, plans to cancel “untapped credit lines and change how some loans are classified to bolster its cushion again losses pending an infusion of government funds”:

The lender has set up a ‘capital hunt’ panel to review ways to conserve money, said Chairman Pratip Chaudhuri in an interview in Mumbai yesterday. The measures, which will include adjusting the risk weightings on loans to companies, may help free up 30 basis points to 100 basis points of risk buffers by March, said chief financial officer Diwakar Gupta, who heads the panel.

State Bank has dropped 37% in Mumbai this year as its tier-1 ratio fell below a government target and bad debts climbed amid an economic slowdown. The lender has been seeking funds from prime minister Manmohan Singh’s administration for almost two years to replenish capital depleted by credit growth and increased provisions for defaults on loans.

Finally, it looks that market participants are finally revisiting their (top estimate) double-digit growth rate for the country.

Credit ratings agency Fitch unveiled its revision in its Global economic outlook: December 2011. It went downward, to 7% from an earlier estimate of 7.5%: 

“India’s economic outlook remains challenging as growth is likely to slow against a backdrop of elevated inflation. The economy is likely to remain weighed down by a combination of the weaker global economy and higher domestic interest rates. This has prompted Fitch to revise down its real GDP growth forecast to 7% in FY-12... from 8% earlier”

The agency has also revised its growth forecast for 2012-13 downward to 7.5% from 8% earlier and for 2013-14 to 8% from the previous estimate of 8.5 %.

The Indian economy expanded by 8.5% last fiscal. The Fitch revision comes at a time when the economy grew by a mere 6.9% in the July-September period, the lowest in nine quarters.

Meanwhile, other market participants are opting for growth projections ranging from 6.9% 7.1%.

Richard Gibbs, global head of economics at Macquarie said in a recent interview with CNBC’s TV-18 that he expects India to grow at the rate of 6.9% in FY12 and: 

“For Indian equities to recover, a signal from the RBI contemplating and moving towards easier monetary policy is required”

Meanwhile, Barclays Capital, as one example from many, have joined the consensus in its ‘Emerging markets quarterly’:

India: High inflation to deter monetary easing

• Growth is slowing rapidly, largely reflecting lagged effects of stern monetary tightening. We expect GDP growth to slow to ~7% in FY 11-12 and ~7.2% FY 12-13, led by weak investment, discretionary consumption
• Inflation remains uncomfortably high even after monetary tightening; will likely average over 7% in 2012 despite the high base of nearly 9.5% in 2011. Global commodity prices are key for the near-term inflation trajectory
• Monetary tightening by the RBI has come to an end. Elevated inflation will, however, deter policy easing. Our central scenario is for a cut in the policy rate from Q2 2012

Standard Chartered also warned in its ‘Global focus 2012’ report that: 

Sub-7% growth for four successive quarters paints a
gloomy picture for India’s economy. However, on a
positive note, demand-side pressure on inflation (WPI
inflation has been above 8% since January 2010) is likely
to be squeezed out.

If so, inflation should slow to the 6.5- 7.0% range by March 2012
and remain at 6.5% in FY13.

Hence, the Reserve Bank of India (RBI) is likely to
reduce interest rates starting in Q1-FY13 (ends 30 June
2012). We expect the RBI to cut rates by 150bps in
FY13. This should improve investment sentiment,
causing growth to rebound, particularly in H2-FY13. We
forecast FY13 growth at 7.4%.

•Risks to our views stem from two key factors. First, if
global commodity prices surge as they did in 2010,
inflation might remain elevated, delaying rate cuts and
thus an upturn in the investment cycle. Second, a failure
to break the policy inertia would impede growth, both in
FY13 and over the long term.

However, don't forget that Standard Chartered is an emerging markets bank and interestingly comes in a bit higher than the rest of the market’s real GDP growth estimates at 7.4% in 2012:

Standard Chartered forecasts: India 
Source: Standard Chartered Research 

However, these estimates still fall below the Indian government’s estimate of 7.5%.

Despite these disappointing results, it’s surely a positive step that the market is recognising officially that India isn’t the golden goose that keeps on giving.

Still, analysts are projecting much better growth rates for 2013 and 2014.

Fitch says ... : 

The Indian GDP growth rate is expected to touch the 8% mark in FY'14 only.

... while top estimates include Standard Chartered’s prediction of 8% growth rate in 2013.

However, without delayed economic reforms and a more stable industrial production landscape and export capacity, it will be interesting to see if India can even reach those targets. 

- Euromoney Skew Blog


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