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India: Reforms are a step in the right direction but not enough to change the fundamental outlook

GDP growth rebounded slightly in year-on-year terms in the second quarter and ended up at 5.5%. (Chart 1) Growth likely remained weak in the third quarter as both manufacturing and agricultural production have struggled. GDP growth rates are slower than during the 2008-2009 financial crisis. Reform proposals presented in mid-September include a hike in the administered domestic price of diesel and liberalisation of foreign investment in the retail and aviation sectors. The reforms are positive news but unlikely to be implemented as a whole. They triggered strong protests, both among the public and opposition parties. Tension is mounting within the ruling coalition. The risk of an early election has risen. The GDP forecast has been revised downward somewhat to 5.5% in 2012. GDP is expected to grow by 6.0% in 2013 and 6.5% in 2014. If the above reforms are implemented quickly, there could be some modest support for growth in 2014 and beyond. However, more substantial growth effects require a much broader set of reforms and growth is unlikely to pick up strongly in the next couple of years. Purchasing managers indices (PMIs) for both manufacturing and services have stabilised recently. The manufacturing PMI came out at 52.8 in September. (Chart 2) The lacklustre performance of the manufacturing sector continues, although there are signs of stabilisation; industrial production beat expectations in August and increased by 2.7% year-on-year. (Chart 3) Exports are still weak and the 3-month moving average is well below zero. (Chart 4) Car sales, a key barometer of the health of Indias economy, fell 5.4% year-on-year in September. (Chart 5) Wholesale price index (WPI) inflation rebounded to 7.8% in September; food inflation has decelerated in recent months. (Chart 6) The jump in WPI inflation has further reduced the room for more expansionary monetary policy. The key interest rate has been on hold since the cut in April. (Chart 7) We expect the Reserve Bank of India (RBI) to keep the interest rate at 8% for the remainder of 2012. The recent reform proposals have buoyed equity and currency markets. (Chart 8) However, global economic uncertainty and the current account deficit will continue to weigh down the rupee. (Chart 9)
Key data Percentage change

TUESDAY OCTOBER 16, 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32

2011 2012 2013 2014 GDP* Inflation (wholesale)* USD/INR** 6.8 9.5 53.0 5.5 7.5 53.5 6.0 7.0 51.0 6.5 7.0 50.0

* Percentage change. ** End of period. Source: IMF, MacroBond, Ministry of Commerce and Industry, SEB.

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