www.marketnomix.com   Asian  Economics  

INDIA •

Growth outlook remains tilted to the downside.

•

Fiscal and Monetary Policy have become confusing amidst a lack of meaningful structural reforms.

•

Room for further rate cuts on easing inflation and as demonetization hurts growth; downside risk to overvalued rupee with slow growth and rise in US yields.

Recent slow growth numbers on Indian industrial production and bank credit to industry cast doubt on the veracity and sustainability of India’s GDP growth numbers. GDP growth came in at 7.3% y-o-y in the September 2016 quarter compared to a 7.1% increase in the previous quarter. We expect GDP growth to slow to 6.5% y-o-y in FY 2017 compared to 7.6% y-o-y in FY2016. Most indicators for consumption and investment remain weak while slowdown was also recorded in exports after having improved in the previous months. The recent move by the government to demonetize Rs1000 and Rs500 notes will have a negative impact on the economy, at least in the short run. Several businesses transact in cash and with demonetization they have become cash strapped hurting business – and consequently revenues, employment, consumption, and investment. Fear of tax inspections will reduce consumption and investment in the economy and lower potential GDP growth over the medium term.

The Indian government’s fiscal consolidation efforts thus far have been an accounting mirage and with the sharp recent slowdown in economic activity, indirect tax growth ahs slowed sharply. Fiscal consolidation would imply corrective actions to ensure fiscal sustainability as the economy grows, not one-time efforts such as divestment and sale of spectrum licences.

India’s manufacturing output remains weak with no increase on a year-to-date (ytd) basis as of October 2016. Investment growth seems to have stalled as bank credit growth remains below 10% on a ytd basis, driven mainly by personal loans. Bank credit to industry slumped to a multiyear low and fell by 1.7% y-o-y in October 2016. Steel and cement off-take has shown some improvement in October 2016, however it remains weak on an ytd basis. Capital goods production has continued to decline. Passenger vehicles production growth saw a slowdown in November while two-wheeler production recorded a sharp decline. This decline was partly on account of inventory correction since the September build-up ahead of the Diwali festive season and partly a result of the government’s demonetization move. Commercial vehicle sales fell sharply by 11.6% y-o-y in November 2016. Consumer goods production has stagnated in the first ten months of 2016 compared to the same period in 2015.

Trade numbers have shown some marginal improvement in recent months off a weak base, however their sustainability remains in doubt. Non-oil exports grew 4.8% y-o-y in November 2016 compared to a 5% y-o-y rise in October 2016 on a 3mma basis after several months of negative growth. This was largely on the back of an increase in organic and inorganic chemicals, engineering goods, and drugs and pharmaceuticals segments while gems and jewellery sector recorded a decline of 12.8% y-o-y in November 2016. Non-oil imports jumped by 11.7% y-o-y in November 2016 on account of sharp rise in gold imports by 23.3% y-o-y that may have been driven by demonetization.

The Monetary Policy Committee kept the policy rate on hold during its December 2016 meeting citing the uncertainty resulting from higher US yields, clouded assessment due to the unfolding impact of demonetization

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and the stickiness of core inflation. CPI inflation has slowed further to 3.6% y-o-y in November 2016 adding to possibility of a rate cut going forward. Global economic and financial market vulnerability remains elevated and with a recent increase in US yields, the rupee can be expected to remain under pressure.

Table 1: Select Economic Indicators .

Nov-16 Actual

Oct-16 Actual

Nov-16 3mma

Nov-16 YTD

2015

2014

Average

Average

% change, y-o-y

Real Sector Industrial Production Two Wheelers Sales: Domestic (DM)

--5.9

-1.9 8.7

-0.6* 8.8

-0.2* 12.2

3.2 0.9

1.8 11.3

Passenger Vehicle Sales Commercial Vehicle (CV) Sales High Speed Diesel Consumption

1.8 -11.6 10.5

4.5 11.9 5.1

8.5 -0.1 1.6

7.8 9.0 6.0

7.7 7.5 5.3

0.8 -11.8 0.6

Railway Goods Traffic Infrastructure Industries Consumer Price Inflation (CPI)

5.5 -3.6

-2.6 6.6 4.2

0.0 4.9* 4.1

-0.8 4.9* 5.1

1.2 1.9 4.9

4.6 5.4 6.6

CPI: Food

2.1

3.3

3.1

5.7

Wholesale Price Inflation

3.2

3.4

3.4

Export

2.3

8.2

5.2

Non-oil Exports Import

0.5 10.4

7.7 8.0

4.8 5.2

Oil Imports

5.9

4.0

Non-oil/non-gold Imports

9.6

1.7

ForEx Rate: INR/USD

-13.0 68.5

-10.4 66.9

-10.6 67.3

ForEx Rate: YEN/USD Nominal Effective ExRate Index

108.4 75.2

103.9 74.9

Real Effective ExRate Index Foreign Ex Reserve: USD bn Visitors Arrivals (Person '000)

115.4 361.1 --

114.9 366.2 754.0

--

--

15.3 6.2

5.0

6.9

-2.7

3.8

-2.0

-17.0

2.4

-0.7 -9.6

-9.0 -14.9

3.2 -0.5

4.4

-18.2

-43.4

-3.2

2.2

-3.7 Actual Value

-1.4

4.1

-84.9 67.3

-126.0 64.3

-140.4 61.1

104.7 74.8

108.1 74.0

121.0 75.3

105.9 72.9

114.8 366.4 679.7*

112.8 361.7 696.1*

112.2 348.2 8027.1

106.7 311.1 7679.1

4.4** 30.5** % change, y-o-y

44.0

34.6

9.2 8.9

12.8 9.3

10.3 9.8

11.1 9.6

13.3 12.3

--

6.7

8.5*

8.7* Actual Value

8.8

12.0

Repo Rate Treasury Bill: 3 month yield

6.25 7.19

6.25 6.36

6.33 6.27

6.52 6.75

7.23 7.65

8.00 8.65

Govt Securities: 10 year yield LIBOR: USD: 3 month EURIBOR: EURO: 3 month

6.26 0.91 -0.31

6.82 0.88 -0.31

6.63 0.88 -0.31

7.28 0.72 -0.26

7.84 0.32 -0.02

8.58 0.23 0.21

Interbank Forward Premia: 3 month

4.42

5.77

5.45 6.32 % change, y-o-y

7.24

8.43

Central Govt Tax Revenue: Gross

--

27.1

11.2*

14.8*

18.6

8.4

Central Govt Expenditure

--

10.8

17.5*

11.1*

6.7

3.1

External Sector

External Sector Trade Balance: USD bn

Foreign Direct Investments: USD bn Monetary Sector Bank Deposit Bank Credit Non-Food Bank Credit

1.8 % change, y-o-y

Monetary Sector

Fiscal Sector

A y-o-y change in 3mma October 2016 is the percentage change in the average of August, September and October 2016 data over the average of August, September and October 2015 data. A y-o-y change in actual number for a month, say October 2016, is the % change in the October 2016 value over the October 2015 value. Source: CEIC, Marketnomix Note: * reflects 3-month moving average (3mma) and year-to-date (ytd) data ending October 2016 ** reflects 3-month moving average (3mma) and year-to-date (ytd) data ending September 2016

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Figure 1. External Trade Remain Weak (3mma, y-o-y, %)

Figure 2. Rupee Overvaluation Rises (3mma, y-o-y, %)

 

 

 

 

Figure 3. Demonetization Leads to Declining Yields (3mma, %)  

Figure 4. Bank Credit Growth Slows Further (3mma, y-o-y, %)  

   

   

 

Index of Industrial Production   The Index of Industrial Production (IIP) fell 1.9% y-o-y in October 2016 after having risen marginally by 0.7% yo-y in September 2016. On a 3-month moving average basis (3mma), production remains stagnant having recorded a fall of 0.6% y-o-y in October 2016 compared to a decline of 0.9% y-o-y in September 2016. IIP growth remained weak across most sectors. Manufacturing output declined 2.4% y-o-y in October 2016 compared to a rise of 0.9% y-o-y in September 2016. On a 3mma basis, manufacturing output declined 0.6% y-o-y in October 2016 compared to a 1% y-o-y fall in September 2016. On a 3mma basis, mining sector production fell 3.3% y-o-y in October 2016 compared to a decline of 2.7% y-o-y in September 2016. Electricity production rose 1.2% y-o-y in October 2016 compared to an increase of 1.4% y-o-y in September 2016 on a 3mma basis. Of the main sectors in the IIP, production of basic metals and coke, refined petroleum products & nuclear fuel have shown an uptrend while that of food products and beverages, textiles, and furniture, manufacturing nec have continued to weaken. On a 3mma basis, basic metals production rose 10.8% y-o-y in October 2016 compared to an increase of 8.5% y-o-y in September 2016. Coke, refined petroleum products & nuclear fuel output increased sharply by 18.4% y-o-y in October 2016 compared to a 7.2% y-o-y rise in September 2016, partly on account of favourable base effect and stability in oil exports. Food and beverage production improved marginally to 1.7% y-

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o-y in October 2016 compared to a 1.3% y-o-y rise in September 2016 on a 3mma basis while furniture, manufacturing nec growth decreased by 5.2% y-o-y in October 2016 similar to the decline recorded in September 2016 after a sharper fall of 12.4% y-o-y in August 2016. The continued decline in capital and slowdown in consumer goods production reflects weak domestic demand in the economy, especially for investments. In October 2016, on a 3mma basis, while capital goods production declined by 23.2% y-o-y, consumer goods production growth came in at a low of 1.7% y-o-y. Consumer durables growth decelerated from an average growth rate of above 20% in the quarter ended December 2015 to 5.4% y-o-y in October 2016 on a 3mma basis. Further, consumer non-durables production also came in weak, declining 1.1% y-o-y in October 2016 compared to a 0.6% y-o-y fall in September 2016 on a 3mma basis.

Table 2: Index of Industrial Production .

Overall Industrial Production Manufacturing Mining Electricity Use-Based Classification Basic Goods Capital Goods Intermediate Goods Consumer Goods Consumer Durables Consumer Non-Durables Manufacturing Sector Basic Metals Other Non-Metallic Mineral Products Fabricated Metal Products ex Machinery & Equipment Chemicals & Chemical Products Coke, Refined Petroleum Products & Nuclear Fuel Rubber & Plastics Products Motor Vehicles, Trailers & Semi-Trailers Machinery & Equipment nec Electrical Machinery & Apparatus nec Textiles Wearing Apparel; Dressing & Dyeing of Fur Food Products & Beverages Furniture, manufacturing nec Infrastructure Industries Index Infrastructure: Over all Steel Cement Coal Crude Oil Natural Gas Refinery Products Fertilizers Electricity

Weights

Oct-16

Sep-16

Oct-16

Oct-16

2015

2014

(in %)

Actual

Actual

3mma

YTD

Average

Average

100 75.5 14.2 10.3

-1.9 -2.4 -1.1 1.1

0.7 0.9 -3.2 2.4

3.2 3.3 1.7 4.3

1.8 0.9 1.9 9.5

45.7 8.8 15.7 29.8 8.5 21.3

4.1 -25.9 2.9 -1.6 0.2 -3.0

3.9 -21.6 2.1 6.0 13.9 0.1

3.6 4.0 1.8 3.1 7.5 0.5

7.0 0.3 2.1 -4.3 -13.8 2.4

11.3 4.3 3.1 10.1 6.7 2.0 4.1 3.8 2.0 6.2 2.8 7.3 3.0

7.7 3.2 -10.3 1.0 18.4 3.5 7.9 6.1 -58.3 -3.7 -10.6 -1.0 -3.0

11.1 2.7 -1.9 -0.7 6.6 4.2 3.8 10.3 -49.7 4.0 -5.7 6.1 10.4

3.7 -1.6 -0.8 4.8 3.7 2.7 7.7 3.2 6.8 3.2 11.0 -3.6 47.2

11.5 3.6 -1.4 -0.3 1.3 2.5 -3.3 2.5 12.0 2.9 -0.3 6.5 0.9

37.9 6.7 2.4 4.4 5.2 1.2 5.9 1.3 10.3

6.6 16.9 6.2 -1.5 -3.2 -1.4 15.1 0.8 2.9

5.0 16.4 5.5 -5.8 -4.1 -5.5 9.3 2.0 2.1

1.9 -1.8 1.7 4.7 -0.8 -3.4 2.0 9.5 4.6

5.4 8.0 6.1 6.8 -0.4 -5.2 0.2 -1.5 9.5

-0.6 -0.2 -0.6 -1.1 -3.3 0.6 1.2 5.9 % change, y-o-y 3.8 4.0 -23.2 -20.0 2.8 3.6 1.7 0.9 5.4 7.1 -1.1 -3.1 % change, y-o-y 10.8 3.6 2.7 4.4 -3.5 1.0 1.7 2.1 9.2 9.8 3.3 1.9 5.1 6.1 7.6 6.6 -52.6 -49.7 -0.2 2.2 -7.6 -2.3 1.7 -6.4 -5.4 3.2 % change, y-o-y 4.9 4.9 16.7 5.9 5.0 6.8 -5.2 2.2 -3.8 -3.2 -4.2 -5.4 9.1 8.6 2.8 7.6 1.7 5.8

A y-o-y change in 3mma October 2016 is the percentage change in the average of August, September and October 2016 data over the average of August, September and October 2015 data. A y-o-y change in actual number for a month, say October 2016, is the % change in the October 2016 value over the October 2015 value. Source: CEIC, Marketnomix

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Table 3: Annual Forecasts Real  GDP  (%  change)  

Consumer  Prices  (%  change)  

2015

2016

2017

 

Country

China

6.9

6.6

6.2

 

India*

7.6

6.5

6.3

Indonesia

4.8

4.9

Japan

0.5

Malaysia Myanmar

Country

Current  Account  (%  of  GDP)  

2015

2016

2017

 

Country

China

1.4

2.1

2.3

 

 

India*

4.9

5.0

5.2

5.1

 

Indonesia

6.4

3.7

0.5

0.6

 

Japan

0.8

5.0

4.3

4.3

 

Malaysia

7.0

8.0

7.6

 

Myanmar Philippines

1.4

2015

2016

2017

China

3.0

2.4

1.6

 

India*

-1.1

-1.4

-2.0

4.2

 

Indonesia

-2.1

-2.3

-2.3

-0.2

0.5

 

Japan

3.3

3.7

3.3

2.1

2.1

2.5

 

Malaysia

3.0

1.2

1.5

11.4

9.8

9.0

 

Myanmar

-7.7

-8.3

-8.0

2.0

3.2

 

Philippines

2.9

1.8

1.4

Philippines

5.9

6.4

6.5

 

Singapore

2.0

1.7

1.8

 

Singapore

-0.5

0.3

0.8

 

Singapore

19.8

19.3

19.3

Thailand

2.8

3.2

3.1

 

Thailand

-0.9

0.3

1.2

 

Thailand

7.8

9.6

7.7

United States

2.6

1.6

2.2

 

United States

0.1

1.2

2.3

 

United States

-2.6

-2.5

-2.7

Euro Zone

2.0

1.7

1.5

 

Euro Zone

0.0

0.3

0.5

 

Euro Zone

3.2

3.4

3.1

6.2

 

3.1

 

Vietnam

0.5

0.4

0.1

   

 

Vietnam

 

6.7

6.1

2015

2016

0.6

   

 

2017

 

Country

  Fiscal  b  alance  (  %  of  GDP)  

Country

Vietnam

2.0

  Policy     Rate***     Official   2015

2016

2017

 

Country

2015

2016

2017

4.35

4.35

4.10

 

China

6.49

6.96

7.35

6.75

6.25

6.00

 

India*

66.33

68.20

72.00

Indonesia

13795

13450

14200

120.42

118.00

125.00

China

-­‐2.7  

-­‐3.0  

-­‐3.3  

 

China

India*

-­‐6.9  

-­‐7.0  

-­‐7.2  

 

India* Indonesia

6.25

4.75

4.75

 

++

  per  U  S  Dollar***     Currency  

Indonesia

-­‐2.5  

-­‐2.5  

-­‐2.4  

 

Japan

-­‐5.2  

-­‐5.2  

-­‐5.1  

 

Japan

0.10

-0.10

-0.10

 

Japan

Malaysia

-­‐3.0  

-­‐3.3  

-­‐2.9  

 

Malaysia

3.25

3.00

3.00

 

Malaysia

4.29

4.50

4.70

Myanmar

-­‐4.8  

-­‐4.5  

-­‐4.6  

 

Myanmar

-

-

-

 

Myanmar

-

-

-

Philippines

0.2  

-­‐0.4  

-­‐1.5  

 

Philippines

3.00

3.00

3.25

 

Philippines

47.16

50.00

52.50

Singapore

2.5  

2.4  

2.4  

 

Singapore

--

--

--

 

Singapore

1.41

1.45

1.50

Thailand

0.2  

-­‐0.4  

-­‐0.4  

 

Thailand

1.50

1.50

150

 

Thailand

36.07

36.02

37.50

United States

-­‐3.5  

-­‐4.1  

-­‐3.7  

 

United States

0.37

0.66

1.50

 

United States

-

-

-

Euro Zone

-­‐2.1  

-­‐2.0  

-1.7

 

Euro Zone

0.05

0.00

0.00

 

Euro Zone

1.08

1.04

0.96

Vietnam

-­‐5.8  

-­‐6.5  

-­‐5.9  

 

Vietnam

-

-

-

 

Vietnam

21890

22200

23000

 

 

* Data for India are for fiscal years - 2015 corresponds to the period April 2015 to March 2016 **One Year Best Lending Rate (%) *** Policy Rates and Exchange rates are as of 31 December 2015, and 22 December 2016 Source: CEIC, IMF, Marketnomix estimates.

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About Us   Marketnomix comprises a team of professional economists providing sound macroeconomic inputs that capture developments in the global economy. Marketnomix aims to positively impact the strategic decisions of individuals and firms. Rajan Govil and Janak Nabar are co-founders of Marketnomix. Between them, they have close to 40 years of experience covering a number of economies. Their research experience spans the sell-side as well as the buy-side, including as global asset allocators. They have provided guidance to institutional clients, corporate treasuries, family offices and high net worth individuals with businesses and investments across the world. Rajan has worked as an economist with the International Monetary Fund (IMF) and as economist/investment strategist with the private financial sector. He presently consults for the IMF and the Asian Development Bank. Rajan has worked as Chief Economist-India and later Regional Economist for Asia-Pacific at HSBC Bank, and as the Head of Investment Strategy, Asia at BSI Bank. Rajan has taught at Delhi University, Indian Institute of Management Bangalore and Vanderbilt University. He has a PhD in Economics from Vanderbilt University. Janak was until the end of 2014, a Senior Investment Strategist at BSI Bank Ltd, Singapore, having assumed responsibility for the Bank’s macroeconomic and asset price outlook for Asia in December 2013. He has worked as an Economist focusing on the Asia-Pacific region with IDEAglobal Ltd. His work experience includes two years with the United Nations High Commissioner for Refugees in Belgrade, Serbia. Janak holds an MSc (Econometrics and Mathematical Economics) from the London School of Economics and Political Science, MA (Mathematics) from Balliol College, University of Oxford (as a Radhakrishnan Scholar), and BA (Mathematics) from the University of Pune, India (ranked first in the University). He currently also heads the Centre for Technology, Innovation and Economic Research (CTIER), an independent think tank based in Pune focusing on innovation and technology policy in India.

Contact Us Email addresses: [email protected] [email protected]

Telephone: Singapore: +65 8149 3016 Bangalore, India: +91 77600 13847 Pune, India: +91 90493 54925

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