Economic slowdown in China will have larger implications for Indian and global economies

While Indian economic growth will overtake China’s in 2015, continuous policy intervention is key to sustain this growth, believes India Ratings and Research (Ind-Ra). In its latest outlook, Ind-Ra has maintained its FY16 GDP growth forecast of 7.7 per cent. The key problem facing the Indian economy is infrastructure deficit (both physical and social). At the current juncture, policy intervention and public spending are critical to address infrastructural issues because of the stretched and over leveraged balance sheets of the corporate sector and higher non-performing advances of the banking sector to fund corporates for this. Most of the recent policy initiatives taken by the government are aimed at addressing these structural issues. If the current policy initiatives and efforts of the government are sustained, Ind-Ra believes the Indian economy will gradually return to a higher growth trajectory over two-to-three year period.

The global economic environment is not encouraging. According to International Monetary Fund, while developed economies are expected to grow faster in 2015 than in 2014, emerging markets and developing economies are expected to slow down. However, advanced economies’ imports growth forecast is promising for the Indian economy. The tepid Indian exports performance is mainly due to the collapse of global trade growth.

Ind-Ra believes recent economic developments in China are bigger issues/concerns for the Indian economy than the Greece issue. An economic slowdown in China will have larger implications for global and Indian economies. Although Indian exports could be affected due to slower global growth, lower commodity prices can provide some support. Indian agriculture’s resilience to monsoon failure has increased over time; however, it is not fully insulated from the vagaries of rainfall. Ind-Ra estimates show that the proportion of non-agriculture in rural net value added to have increased to 70% in FY13, allaying fears of a sharp demand slowdown in the event of sub-par monsoon. In case monsoon performance is in line with India Meteorological Department forecast, Ind-Ra expects GDP growth to decline by 23bp.

Ind-Ra opines the budding industrial and investment recovery has to be nurtured. However, low capacity utilisation of the manufacturing sector suggests that a full-blown investment recovery is still 12 to 18 months away. Increasing demand due to a decline in inflation and monetary easing will increase consumption demand and capacity utilisation, which will then translate into investment demand.

With growth-inflation dynamics improving and inflation likely to remain in the Reserve Bank of India’s (RBI) comfort zone, there is still some room for RBI to do further monetary easing. This is however subject to proactive food management by the government to control the inflation arising out of sub-par monsoon (if it happens). In such a situation, Ind-Ra believes RBI will go for another 25bp cut in policy rates in FY16.

Ind-Ra expects the current account to remain comfortable in FY16 (1.3% of GDP) and does not pose any challenge to the macro-economic stability of the economy. Ind-Ra does not rule out intermittent volatility in the currency market and expects RBI to intervene in the forex market to counter unusual volatility. The rupee might trade in the band of 61/USD-64/USD during FY16 and settle at around 63/USD (average).