Prevailing low inflation and interest rates should spur Indian government to push through reforms and investments, suggests a report by Asiya Capital Investments Company, a Kuwaiti investment company.
Last week’s figures show the Indian economy to be in good shape with a positive outlook. The gross domestic product (GDP) figure for the first quarter of 2015, showed real GDP growth of 7.5 percent YoY, a robust pick-up from the previous quarter’s 6.6 percent. Reserve Bank of India (RBI) meanwhile cut rates by 25 basis points to 7.25 percent. High inflation had been a longstanding issue in India, but recent data has shown a sharp moderation in price growth. It appears like the South Asian economy is one of the few bright spots in today’s gloomy global economic environment.
India’s GDP is one of the fastest growing in the world, ranking in the top ten and outpacing China. However, the data is misleading. In January, India revised its GDP calculation methodology, which pushed the 2013-14 fiscal year growth rate from 4.7 percent to 6.9 percent and added 1.9 percentage points over the 2012-13 growth rate. These figures do not match the trend of other indicators such as industrial output, CAPEX, imports, credit and auto sales, receiving a great deal of criticism. ( See graph below)
Furthermore, statistical discrepancy has added 1.8 percentage points to GDP growth in the first quarter. In terms of prices, the data is inconsistent between the wholesale (WPI) and consumer price (CPI) indices. WPI is in deflation while CPI is rising at a stable pace. Furthermore, the decline in WPI is mainly led by a fall in energy prices, while energy prices are not falling for consumers. The key common trend in wholesale and consumer prices is food.
In both cases, food prices continued to grow faster than other products, a key indication that structural issues have not been resolved. The Indian economy lacks adequate infrastructure, such as roads and product storing facilities, causing supply constraints in the food market and adding upward pressure to prices.
In the next few months, various factors will contribute to a rise in inflation. Energy inflation is expected to pick up following the recent gains in global oil prices. Furthermore, compared to twelve months ago, energy prices will look much higher in the second half of this year – the period last year when the price of oil dropped sharply – fueling annual inflation. Food prices will also face upside pressure during the same period, as India’s meteorological department projects a second year of weak rainfall. Finally, the US Federal Reserve is expected to hike rates sometime this year. This could trigger outflows from emerging markets like India, hurting the Indian rupee and creating another source of inflation.
Prime Minister Modi’s administration faces a tough second half of 2015. Investments need to take off, and this must be facilitated by the government. Lower inflation has allowed monetary policy to be loosened, setting the right environment for private investments. However the authorities need to fast track some of the reforms, such as the streamlining of approval requirements for projects. There is little time left for the government to act before the central bank is forced to halt the loosening process due to increasing price pressures.