India's macroeconomic outlook: Is uncertainty the new paradigm?

The provisional growth estimate for India for 2014-15 is 7.3%, higher than 6.9% growth in 2013-14. In this article, Bornali Bhandari – a Fellow at the National Council of Applied Economic Research – argues that the figures mask the volatile path that growth has taken in 2014-15. She discusses the key uncertainties faced by the Indian economy last year, and their implications for growth going forward.

Last year, while preparing the Quarterly Review of the Economy at National Council of Applied Economic Research (NCAER) in April 2014, we predicted that there were three uncertainties that would decide the course of the Indian economy - national elections 2014, weather, and the world economy. While the 2014–15 growth estimate shows improvement over the 2013–14 growth, it hides the volatile path that growth has taken over the last fiscal year¹. Unfortunately, it seems 2015–16 will be no different.

Uncertainties

In July 2014, the first uncertainty resolved itself. The national elections yielded a single-party majority rule after three decades (the last was in 1989). The euphoria was apparent. The NCAER Political Confidence Index (PCI) went up by 21% in April 2014 and 20% in July 2014 (on a quarter-on-quarter basis)². The Bombay Stock Exchange (BSE) Sensex has showed double-digit growth since February 2014 on a year-on-year (y- o-y) basis. In 2014–15, the growth rate was 32.3%.

The second uncertainty related to weather has played out to the full meaning of the word. Not only was there was a rainfall deficit (88% of its Long Period Average (LPA), as per the 2014 Southwest Monsoon Report) but the rainfall itself was temporally and spatially uneven, affecting kharif crops 3. Unfortunately, the rainfall saga did not end there. Unexpected rainfall in March 2014 added to our agricultural sector woes affecting production of rabi crops in North India. The third advance estimates from the Ministry of Agriculture suggest that the production of foodgrains is expected to fall by 5.3% in the current fiscal year.

The third uncertainty relates to the rest of the world. The International Monetary Fund (IMF) World Economic Outlook (WEO), April 2014 predicted that the world will grow at 3.6% in 2014. From the latest IMF WEO April 2015, we know that it ended up growing at 3.4% but after it had been revised downwards through July and October by 0.1% each. Unfortunately, that is not the whole picture. The IMF-WEO October 2014 said that in contrast to predictions made in April 2014, growth was weaker in some countries especially US, Germany etc. Growth was predicted to be uneven and multipolar. Further, a military intervention by Russia in Ukraine and civil war in Yemen added to geopolitical tensions and uncertainties.

The big positive surprise was the dramatic fall in crude oil prices (Figure 1). For example, the World Bank Commodities Price Forecast in July 2014 was predicting the average price of crude oil to be US$106.1 per barrel in 2014 and US$104.4 in 2015 (in nominal dollars). In the October 2014 issue, the corresponding (predicted) numbers were US$101.5 and US$95.7. As per the January and April 2015 issues, the actual numbers in 2014 were US$96.2 and the 2015 predicted value was US$53.2 per barrel. The price of Brent Crude Oil fell from US$101.92 in August 2014 to US$48.42 in January 2015 before rising again. The IMF has predicted the average price of oil to be US$58 per barrel in its March 2015 outlook. The average price of Crude Oil in the first quarter of 2015–16 was US$61.3 (World Bank Pink Sheet). It has edged down to US$50 per barrel in July 2015.

Overall Consumer Price Index (CPI) inflation in India fell from 8.7% (y-o-y) in April 2014 to 5.3% in March 2015 (Ministry of Statistics and Programme Implementation (MoSPI)).

Figure 1. Average international crude oil prices and inflation, 2014-15

Notes: Average International Crude Oil prices are in US$ per barrel; Inflation expressed as % change y-o-y.
Source: IMF.

Last but not the least; uncertainty was caused by the move to ‘new’ Gross Domestic Product (GDP) numbers in January-February 2014. Although one may hope that this is a short-run issue which will dissipate over time. The new GDP numbers means that the methodology has changed to calculate GDP, what to track has changed and absence of previous years’ numbers means that we do not how to anchor our expectations. While, the Reserve Bank of India (RBI) still tracks Gross Value Added at Basic Prices ( GVABP), the Government is tracking GDP at market prices (GDPMP). This is not a small matter because the numbers are giving different signals! The GVABP is showing further slowdown in the fourth quarter of 2014-15, whereas the GDPMP is showing improved growth (Figure 2).

Figure 2. Gross Value Added and Gross Domestic Product, 2014-15

Notes: Gross Value Added is at Basic Prices and Gross Domestic Product is at 2011-12 Market Prices; % change is y-o-y; Data is for 2014-15: Q1-Q4.
Source: MoSPI.

Outcomes

Agricultural growth shows worsening in the third and fourth quarters of 2014–15 due to the unpredictable rainfall (Figure 2). Industry comprising mining and quarrying, manufacturing, electricity, gas, water supply and other utility services, and construction, shows volatile growth. It performed very strongly in the first two quarters but slowed down significantly in the third, improving in the fourth. The manufacturing sector is driving its growth. However, except significant improvement in manufacturing and some in mining, all other sectors in industry show slow economic growth in the fourth quarter. Growth in the construction sector has fallen to 1.4% in 2014–15 :Q4 from 8.7% in 2014–15 :Q2. These numbers signal that the economy is in far better condition than if one looked at the other indicators of economic activity like the Index of Industrial Production (IIP). The y-o-y growth of IIP has fluctuated from 4.5% in 2014–15 :Q1 to 1.3% in 2014–15 :Q2 to 2% in the third quarter and to 3.2% in the fourth quarter.

The services sector showed strong and consistent growth till the third quarter but has slowed down in the fourth quarter. The trade, hotels, transport and communication, and services related to broadcasting (largest sub-sector in the services sector) jumped from 7.4% in 2014–15 :Q3 to 14.1% in 2014–15 :Q4. And the Public administration, defence and other services experienced a fall in the growth rate from 19.7% in 2014–15 :Q3 to 0.1% in 2014–15:Q4.

Therefore, overall, while 2014–15 (7.3% provisional estimates, GDP Market Prices, 2011-12) may turn out to be better than 2013–14 (6.9%), performance of the economy remained volatile.

2015–16

So what does 2015–16 look like? The uncertainties regarding the weather and world economy remain, although the former seems to be resolving itself in a positive fashion so far. The NCAER PCI fell on a quarter-on-quarter basis in April 2015 signalling re-adjustment of sentiments from the highs of last year. Overall sentiments remain bullish.

Although the arrival of the southwest monsoon was delayed for the country as a whole, rainfall was near normal between 1 June and 15 July 2015. It has been only 6% below LPA. Unfortunately, this does hide spatial and temporal variations. Northwest India received surplus rainfall (15% above its LPA) and other regions were in deficit (13% in central India; 12% in south India; 6% in east and northeast India). Between 1 July and 15 July 2015, rainfall was 32% below LPA for the whole country with normal rainfall in the northwest, east and northeast India. During this period, central and south India have received rainfall below 54% and 60% their respective LPAs. The forecasts suggest that the initial deficit (88% of LPA) in rainfall predicted by the Indian Meteorological Department (IMD) may resolve itself in a positive manner, on the margin.

Unlike the weather, the global economic sentiment seems to be taking a turn for the worse with uncertainties intensifying. The IMF-WEO April 2015 predicted that the world will grow at 3.5% growth with divergent growth paths between the advance (AEs) and emerging economies (AEs) and developing economies. The July 2015 update shows a marginal downward revision to 3.3%, and the divergence between the two groups of economies continues. The Greek melodrama and Chinese economic upheaval have added to the uncertainty in global sentiment.

The outlook for merchandise exports for India looks dim especially given the slow growth forecasted in the Asian emerging economies, which form more than 50% of our exports market. Services exports may perform better with growth in AEs but not much better. As shown in Sangita (2015), manufacturing and services exports have a complementary relationship. With bleak growth predicted in manufacturing exports, services exports growth may be muted.

Crude oil prices are predicted to be lower than before but they are subject to various risks, especially geopolitical tensions. Further, the improvement of the US economy may mean increases in the US interest rates, which may have further uncertain effects on India. In fact, even the improvement in the US economy is uncertain given the unexpected lower growth in the first quarter. However, the US unemployment rate in June 2015 was 5.3%. Finally, keeping everything else constant, a fall in the general price level is supposed to stimulate demand. However, the current inflation as perceived by the households in March 2015 was as high as 9% (RBI, April 2015). Actual CPI Inflation was 5.3% in the corresponding period (MoSPI).

Therefore, 2015–16 promises to be a roller-coaster ride too. Handling these uncertainties in real time, along with pushing the longer-term agenda of high, equitable and sustainable growth, continues to be the challenge confronting policymakers.

Views are personal.

Notes:

In terms of Gross Domestic Product at Market Prices (2011-12 prices), the growth estimate for 2014-15 is 7.3% and for 2013-14 is 6.9%. In terms of Gross Value Added at Basic Prices, the growth estimate for 2011-12 is 7.2% and for 2013-14 is 6.6%.
The National Council of Applied Economic Research (NCAER) has been conducting Business Expectations Survey (BES) every quarter since 1992-93. The survey tracks both the business and political confidence of Indian companies. On the basis of the responses received from over 500 companies, a composite index called political confidence index (PCI) is computed. The NCAER PCI is based on the perceptions of the business sector about the performance of the central political leadership on the following eight economic indicators over the next six months as compared to the ‘present’. The eight indicators include managing overall economic growth, managing government finance, managing inflation, managing unemployment, managing exchange rate, managing conducive political climate, external trade negotiations, and pushing the economic reforms forward. All eight components carry equal weight. If the PCI increases for a particular round, it is due to the larger proportion of positive responses on one or many indicators in that round.
The Indian cropping season is divided into two major seasons in India – Kharif and Rabi. In the Kharif season sowing takes place between May and August and harvesting takes place between September and January. Exact months vary from state to state depending on the arrival of monsoon. In the Rabi season sowing takes place between September to December and harvesting takes place between January and May.