Schroders Quickview: Indian concerns remain despite good growth
Momentum is improving and we expect better performance this year compared to 2015, but reform efforts must continue.
The first quarter of 2016 saw Indian GDP growth accelerate to 7.9% year-on-year, from 7.3% in the previous quarter, beating consensus expectations of 7.5% growth. The government’s preferred measure, GVA1, expanded 7.4% compared to 7.1% previously.
The improvement is roughly in line with that seen in higher frequency data, though we still have our doubts over the level of growth. Industrial production, for example, was barely positive in Q1.
In general, the rest of the economic data looks more consistent with a 6% growth rate than one approaching 8%.
Concerns over measurement aside, momentum does seem to be improving and combined with recent legislative gains, this should provide reassurance that the economy is headed in the right direction.
With regards to legislation, the latest session of parliament has seen the passing of the Aadhar Bill (which will greatly increase the efficiency of government transfers) and the Bankruptcy Code (which addresses the ease of doing business and should also help in resolving India's bad debt problem), among others.
Again, the trend of gradual improvements continues, even if huge leaps forward are proving elusive.
One other risk for India, although on the upside, lies in the monsoon rains. The past two years have seen below-normal monsoons, hurting harvests and resulting in lower growth and higher inflation than would otherwise be the case.
This year, with the El Niño weather phenomenon switching to La Niña, monsoon conditions are much more favourable, and so we should see a better harvest. On the growth side, this can compensate for weaker manufacturing output.
On inflation, given that food is around 46% of the consumer price index (CPI) inflation basket, the benefits are obvious.
Overall, we expect India to deliver a better growth performance this year than in 2015, though we might quibble over the level that is actually being achieved.
The issue of measurement should not be trivialised; reform efforts should not falter on the back of complacency linked to delusions of a supercharged economy.
1. Gross added value. In 2015, India switched to using gross value added (GVA) as its preferred growth metric rather than gross domestic product (GDP). The difference between the two is that GDP includes the net taxation position (taxes less subsidies), while GVA does not.↩
Important information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.