5 Things the RBI and GDP Taught Us About the Indian Economy This Week
India could be accused of being a little too predictable this week. The country’s economic growth figures were bang-on economists’ expectations while the central bank provided markets what they prophesied – no change in interest rates.
However, a closer look at India’s GDP growth of 7.4% and the Reserve Bank of India’s decision to keep the key lending rate at 6.75% reveals some interesting things about how Asia’s third-largest economy is doing right now.
#1: India Is Still Waiting for the Right Type of Investment
Fixed investment growth rose to 6.8% in the three months ended September compared with a year earlier. That rate of expansion was up from 4.9% the previous quarter but analysts warned the rise might just reflect an increase in public spending on infrastructure, rather than a surge in investment by private companies. Until that changes, India’s recovery will remain tenuous.
“A revival in private-sector capital expenditure will be required to sustain the recovery in investment activity, because India’s weak fiscal position will limit the ability of the government to further expand public sector-led investment,” Rahul Ghosh, a vice president at Moody’s said in a note.
#2: India’s Weak Monsoon Has Dampened Growth
Monday’s GDP figures showed India’s private consumption growth had slowed to 6.8%. That was likely because of subdued rural demand that was depressed by a bad monsoon. Seasonal rains are all important for the Indian economy, and this year the rainfall was 15% below average. It is the second year the monsoon was lower than normal. The rainfall shortage also weighed on farm production, which grew just 2.2% in the three months ending Sept. 30.
#3: Inflation Is Still a Threat
When it comes to inflation, India is moving away from a sweet spot. After diving below 4% this summer, inflation has turned up and is expected to rise further. Increases in the prices of housing, recreation, education and health services were major contributors to accelerating prices. RBI Gov. Raghuram Rajan said the uptick in inflation “warrants vigilance,” and analysts don’t expect any new monetary-policy easing until next year.
#4: India Can’t Depend on Exports for Growth
Global trade is dragging on the Indian economy. Exports have now contracted for 11 months in a row due to weak global demand. The root problem is anemic growth in the U.S., Europe and China, which worries the RBI.
#5: Still, the Country Is Pulling Ahead of China
The latest data suggest that the South Asian nation is cementing its place as the world’s fastest-expanding large economy. India’s economy grew 7.4% growth in the most-recent quarter a full half percentage point more than China’s 6.9%. If one is to believe economist projections, the trend is here to stay.