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India: No Hard Landing for Asia's Other Giant

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India: No Hard Landing for Asia's Other Giant

by Glenn Levine, Moody's Analytics, 20 October 2011
topics:
Risk Management
tags:
external demand forecast GDP India industrial production inflation
  • India’s economy is slowing. The external situation is deteriorating and the central bank’s monetary tightening is crimping domestic demand
  • Our GDP forecast is for 7.4% growth this year and next, though with increasing downside risks
  • It is difficult to foresee a hard landing in the medium term
 
India’s economy is slowing markedly through the second half of 2011. Recent data confirm the slowdown and suggest that the Reserve Bank’s tightening campaign is hurting growth, capping consumer and corporate spending. The external situation also looks set to trim GDP growth over the coming six to 12 months via weaker exports and the hit to local confidence.
 
However, we will stick with our forecast for 7.4% GDP growth in 2011 and 2012, which was already at the bottom end of consensus estimates, but we note growing downside risks.
 
A domestic slowdown
India’s central bank has been the most aggressive in Asia in trying to rein in inflation, but the use of this blunt policy instrument has hurt domestic demand, which still accounts for the bulk of economic activity.
 
Industrial production grew just 4% year-on-year in August after running at 7.4% year-on-year through the first half of 2011. India’s industrial production series may be less important to the overall growth picture than that of other economies, given the country’s reliance on services and agriculture. Yet industrial production provides a good gauge of current conditions and reflects the second-half slowdown.
 
The production breakdown reveals a steep fall in consumer durables and investment goods output, showing that the bulk of the recent softness is due to weaker domestic demand. Passenger car sales have been weak for at least six months and commercial vehicles have also begun to soften, confirming that consumer and business spending has slowed.

Click on image to enlarge
 
Forward-looking indicators confirm the second-half slowdown. The September purchasing managers’ index fell to 50.4 from 53.6 in August, suggesting that industrial activity is barely growing, while the services PMI is now in contractionary territory (49.8 in September).
 
The OECD leading indicator, which provides the best reading on activity three to nine months in advance, suggests that output will contract mildly through the remainder of 2011 and in the opening months of 2012.
 
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