Weak demand and cost-push inflation is likely to result in a stagflation-type scenario in India over the coming period. Political uncertainty is also set to rise in the coming months due to the upcoming state and the general elections, points out Nomura in its Asia Insights research note

India’s economic outlook is negative over the next six months due to weak growth, balance of payment pressures, cost-push inflation and rising fiscal and political risks, feels Nomura Financial Advisory and Securities (India) Private Limited in its Asia Insights research note. The economy is not at an inflexion point yet. Risks remain skewed to the downside over the next six months. The growth outlook is very weak, and hence, even as the current account deficit moderates, growth-sensitive capital flows – equity and debt – are also likely to moderate sharply, leading to pressure on the balance of payments, forecast Nomura analysts.

Weak demand and cost-push inflation will likely result in a stagflation-type scenario in India over the coming period. Risks of a fiscal slippage are rising, and the only way we see of sticking to the budgeted fiscal deficit target (of 4.8% of GDP) is to cut spending, which would hurt growth, warns the Nomura research note.

According to Nomura, political uncertainty is also set to rise in the coming months due to the upcoming state and the general elections. Hence, it does not see the current optimism as sustainable and remains negative on the economic outlook for now. On the policy front, it expects the repo rate to remain on hold at the 20 September 2013 policy meeting and it is forecasting 75bps of cumulative repo rate cuts in FY15.

Other highlights of the research note include:

(a) Industrial production (IP) rose 2.6% y-o-y in July, above expectations, led by a surprise jump in two of the most volatile components of capital goods. Excluding capital goods, IP rose a more muted 0.8% y-o-y in July versus -1.2% in June.

(b) Nomura does not see this rise as sustainable as financial conditions have tightened, which should impinge on domestic demand. It expects overall GDP growth to slow to 4.2% y-o-y in FY14 versus 5.0% in FY13, despite better agriculture growth.

(c )  CPI inflation moderated to a still-elevated 9.5% y-o-y in August from 9.6% in July. Food inflation remained high (at 11.1% y-o-y), while core CPI inflation inched higher (to 8.2%) due to a rise in services price inflation. 

(d) Nomura expects CPI inflation to become increasingly important in monetary policy decisions, compared with WPI currently, with a greater focus on core CPI as a measure of demand-side inflation. 

(e)  Weaker demand and lower food inflation should moderate CPI inflation in the coming months, but the persistence of high CPI inflation due to elevated inflation expectations remains a key concern.

The industrial production scenario is shown in the following chart:

On the common man’s woes, the food inflation trend is shown in the following chart: