Economy
Economic growth to moderate further in the coming quarters: Report
There are signs of moderation in the proprietary indices of Nomura that try to gauge India’s growth momentum and near-term monetary policy path. Only one in five of Nomura’s indicators accelerated in May (compared to April), down from three at the end of the March quarter. According to their Composite Leading Index, non-agricultural GDP growth is likely to moderate during the June quarter up to December 2016 due to the lagged impact of tighter financial conditions. Nomura expects good monsoons, Seventh Pay Commission pay hikes, higher government spending and easier liquidity to support growth. However, impact of this will be realised later on. Hence, GDP growth is expected to rise very gradually to 7.3% y-o-y in 2016 from 7.2% in 2015, before picking up to 7.7% in 2017, the report states.
 
According to a report from SBI’s economic research department, credit growth continues to be a laggard. The overall credit-deposit ratio is at 75.4% as on 8 July 16 from 75.8% a year ago and 77.6% in 20 March 2016. Accordingly to the fortnightly data of all scheduled and commercial banks, the credit off-take (YoY) recovered from the historical low of 8.7% as on 10 June 2016 to 9.8% on 8 July 2016, compared to last year growth of 8.9% in 10 July 2015. SBI expects a 13%-14% credit growth, but mostly on the back of refinancing by banks on completed infrastructure projects in sectors like power and roads, where there are no risks. But this is likely to happen in the second half of current fiscal. The yearly SBI Composite Index for July 2016 is showing an upward momentum and is at 51.0 (suggesting low growth), compared to last month’s 48.9 (suggesting low decline). The monthly composite index increased marginally to 50.9 in July 2016 from 50.6 in June 2016.
 
 
Diesel consumption, cellular subscriptions, railway passenger traffic and airline freight have all slowed in the June quarter. Investments and financial services have yet to show any signs of recovery, mirroring stressed bank balance sheets, slow corporate deleveraging and ample spare capacity in the manufacturing sector. Public sector investments have yet to gain traction, tracking significantly below last year’s levels on a three-month moving average basis. The Monthly Activity Indicator, a weighted-average growth indicator, slowed to 6.8% y-o-y in May from 7.8% in April and 8.1% at the end of March, indicating weaker growth momentum in the June quarter.
 
 
The Nomura Economic Surprise Index rose to -0.07 in mid-July, from -0.20 in mid-June, indicating positive data surprises relative to consensus expectations. The manufacturing PMI rebounded in June, rising above its three-month trend, while industrial production for May improved despite still being fairly weak. Rather than robust data, the improvement was instead driven by a downward adjustment in consensus expectations owing to past disappointments.
 
The Nomura RBI Policy Signal Index remains in the neutral (no rate change) zone due to elevated inflation and a marginal improvement in external demand. In mid-July, the RBI Policy Signal Index stood at -0.09 versus -0.11 in June. Historically, index values lower than -0.2 have coincided with a rate cut, while values between -0.2 and +0.2 have corresponded to policy rates staying on hold. Hence, the Repo rate is expected to be kept unchanged at the 9th August monetary policy review. Over the past month, the benchmark 10-year G-Sec yield eased to 7.27% as on 21 July from over 7.50% seen in June.
 

 

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COMMENTS

SuchindranathAiyerS

10 months ago

Essentially, as Nomura sees it, India's Economic Growth will lag behind real inflation.

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Sprinting the Marathon

Vijay Joshi is emeritus fellow of the Merton College, Oxford. Unlike professors teaching and researching in foreign universities, Joshi has had ringside view of the Indian economy having held official positions like the special advisor to the governor of the Reserve Bank of India, director of JP Morgan Indian Investment Trust and consultant to several international organisations like the World Bank. In this book, he asks and answers three simple questions. One, how realistic is it for India to become a prosperous country over the next 25 years, given the current institutional structures? Two, how can we speed up the progress? Three, how can we quickly eliminate extreme poverty?

 

The short answer for the first question is: it is really tough; almost impossible. The short answer to the third question is a radical overhaul of the subsidy regime and direct cash transfer to the very poor. Much of the book is devoted to answering the second question which, indeed, is what we are interested in. For starters, what is the definition of a prosperous country? Possibly, the level of per capita income enjoyed by the lower rung of high-income countries today (say Portugal), with the condition that national income should be widely shared and even the poorest people should have a good standard of living, as we see in Europe. 
 
This goal can be reached only by ‘high-quality’ per capita growth of income of around 7% a year for a quarter century, starting now. By ‘high-quality' growth Joshi means growth that is distributive and not concentrated in the hands of the powerful. Though growth economists have not traditionally bothered about the social parameters, Joshi’s high-quality growth has one more element: growth that is environmentally-friendly. How tough is this kind of quantitative and qualitative growth target? 
 
The central argument of this book, and one with which I wholly agree, is that with 'business-as-usual' policies, India will be hard put to achieve high-quality and enduring per capita growth of even 6% a year, let alone 8%, which would be necessary for it to become a prosperous nation in the next quarter century. What we need is radical reform. Why can’t we grow at a 7%-8% clip? Because it is really tough, as history tell us. 
 
A study by Lant Pritchett and Lawrence Summers examined growth in all countries, for which data exists, from 1950. From 1950 to 2010, there have been just three countries that have recorded super-fast growth (6%+) for three decades continuously. These were China (1977-2010: 8.1%), South Korea (1962-91: 6.9%) and Taiwan (1962-94: 6.8%). Note that just one country—China has had a per capita growth rate of more than 8% a year for 30 years. And none of these three was a democracy during this high-growth period. 
 
Indeed, apart from these three countries, no other country has had per capita growth of 6% for a continuous period of even two decades. Super-fast growth phases are quite short and nearly always end in a sharp slowdown, probably because of overconfidence bias of bankers, politicians, officials and businessmen. 
 
It is worthwhile to remember that while we are celebrating 25 years of liberalisation, India has had a just one longish period of super-fast growth, which is 2003-11. If we look back, we had only a small role to play in this growth spurt. It was first a global growth wave, led by China. When this brought a global financial crisis, growth was goosed up by loose money policy, which obviously was unsustainable beyond 2011. That year, India started raising interest rates and the growth rate collapsed.
 
What can India do to start sprinting for the next 25 years? Joshi diagnoses the problem correctly: stop intervention by the Indian State. “It often intervenes, arbitrarily or to correct supposed market failures… That is why India is regarded as one of the worst places in the world to do business… It quite properly intervenes for redistributive purposes but does so ineptly and ineffectively.”
 
Neither does the Indian State “deliver in the areas that fall squarely in its province, such as administering law and order… making sure that public services are provided and creating an effective and adequate safety net for poor people.” 
 
The direction is clear: “both the state and the state-market relationship need urgent reform… Without such a reconstruction the project of rapid and high-quality growth is very unlikely to succeed.” But the irony is every policy-maker in India already knows this. So did the previous prime minister, an erudite economist. The key is bold political leadership, not another correct economic diagnosis.

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