Gold Silver Reports → A closer report at India’s impressive 7.3% real gross domestic product growth for the October-December quarter reveals a troubling reliance on urban consumption, casting doubt on the nation’s ability to drive global growth as China stumbles.
India’s jewelry demand rebounded in the second half of the year, the World Gold Council reported Thursday. “India was at the forefront of [positive areas],” it said. And this past December, the International Energy Agency called India the only major economy where coal demand is on the rise.
India was the world’s ninth-largest economy in 2014. It surged past Brazil, which faces negative growth, to No. 7 in 2015 and will likely reach sixth place by 2020, according to the International Monetary Fund. The South Asian powerhouse is increasingly a buffer against the global economy’s deceleration.
GDP figures released Monday appear to support the world’s optimistic narrative. India managed to keep growth in the 7% range for three quarters straight, even as China’s fell to the 6% level. Growth for the year ending March is seen coming in at 7.6%.
Below the surface
But digging deeper gives a glimpse of a gloomier reality. Capital investment, a key pillar of domestic demand, rose only 2.8% on the year for October to December, the slimmest increase in five quarters. Personal consumption, the other key factor, remained strong overall. But tractor sales, reflective of consumption in the country’s farm areas, continued to slip below year-earlier levels. India’s growth thus appears driven primarily by purchasing of scooters and other urban products.
Gross-value-added figures also foreshadow trouble. Nominal GVA, reflective of the economy as felt by businesses, is seen growing 6.8% in fiscal 2015. This would mark a significant slowing from the 10.5% growth of the year before.
GVA is highly correlated with growth in Ebitda — earnings before interest, taxes, depreciation and amortization — for components of the S&P BSE 500 index, listed on Mumbai’s stock exchange. Ebitda growth likely will only reach single digits for fiscal 2016, India Ratings and Research has predicted. The figure would thus amount to less than half the 17-22% growth rates seen between fiscal 2009 and fiscal 2011.
Corporate earnings struggled in the October-December quarter. Profit fell 22% at Hindustan Unilever, India’s largest consumer goods manufacturer. Domestic operations of major automaker Tata Motors incurred a net loss as well. Sweeping economic reforms promised by Prime Minister Narendra Modi, aimed at revitalizing business, have clearly run aground. The S&P BSE Sensex index is down 23% from its record high in 2015, and sits 7% below its level right before Modi took office on May 26, 2014, suggesting that the “Modi bump” has more than caved in.
Looking for hope
Banks here require “deep surgery,” Reserve Bank of India Gov. Raghuram Rajan said Thursday at the Confederation of Indian Industry’s banking summit. The central bank has been cutting interest rates of late. But private banks’ lending rates have fallen by only half the amount of these cuts, a fact Rajan blames on nonperforming debt weighing on balance sheets.
“Our intent is to have clean and fully provisioned bank balance sheets by March 2017,” the governor said.
The key to improvement is not economic reform or large public works, but lower lending interest rates, Bank of America Merrill Lynch has said. Markets’ focus is indeed shifting from Modi’s bold reforms to Rajan’s monetary policy. Some players have also come to expect further policy rate cuts.
Yet developed nations now stand as proof of monetary easing’s tendency to push the fragility of economies to the fore. Without regulatory and other deep economic reform to accompany central bank measures, India will never be able to become a true engine of global growth. → Neal Bhai Reports