India is set to overtake China to become the world’s fastest growing major economy in 2015. Growth numbers this year have been helped by a surprise move by the government in January to revise the methodology of how the country’s GDP was calculated, resulting in much higher figures and raising some questions.
The IMF managing director Christine Lagarde has described India as “a bright spot” amid the economic woes faced by the other major emerging market countries, Brazil, Russia and China.
But India this month slashed its growth forecast to between 7 and 7.5 per cent for the financial year to March, compared with an earlier range of 8.1 to 8.5 per cent.
“2015 has been a year in which we think that the economy has started healing itself,” says Abhishek Lodha, the managing director of Lodha Group, India’s largest housing developer by sales.
India’s GDP grew by an annual rate of 7.4 per cent in the July-to-September quarter, putting it firmly ahead of China, where growth slowed to 6.9 per cent in the same period.
“The Indian economy has made considerable progress in the last one year,” says Vivek Srivastava, the chief executive of health care at Home India, based in Delhi. “However the growth has been uneven and driven majorly by private consumption and public investment. For robust and sustainable growth, private investment and exports needs to revive.”
India relies heavily on oil imports and lower prices helped to lift the economy this year.
“The key driver of GDP growth in 2015 was falling oil and other commodity prices which improved corporate margins and household purchasing power, while also improving government tax collections and lowering the subsidy bill,” according to Pranjul Bhandari, the chief India economist at HSBC.
But there have also been significant negative factors.
“Continued weakness in global demand and the second consecutive poor monsoon-season rainfall have hurt growth dynamics,” says Rajeev Malik at CLSA, an investment bank and brokerage. “The revised GDP methodology has led to a disconnect between official GDP growth and on-the-ground reality, including feedback from businesses.”
He says that “actual real growth could be 1 to 2 percentage points lower than the reported figure, although a gradual improvement in momentum is visible”.
Interest rates, inflation and lentils
The Reserve Bank of India (RBI) cut interest rates four times this year as inflation eased sharply. Rate cuts had been widely called for by the industry to reduce the cost of borrowing and help stimulate growth.
But, recently, inflation has been driven higher by a surge in the prices of pulses, including lentils, a staple of the Indian diet.
The consumer price index, a measure of retail inflation, rose to 5.4 per cent in November year on year, with the price of pulses up by 46.1 per cent.
“This year’s spike is explained by supply-side shocks,” according to Crisil Research, which is part of Standard & Poor’s.
“Three consecutive monsoon shocks – deficient south-west monsoons in 2014 and 2015 affecting the kharif season output, and weather disturbances in March 2015 affecting rabi output – have hurt overall pulses production.”
The RBI kept interest rates on hold in its December meeting because inflation had inched higher.
“The rise in Indian consumer price inflation in November doesn’t put the RBI’s inflation target for January 2016 under threat, but it does highlight that the central bank cannot be certain of meeting its more challenging medium-term targets,” says Shilan Shah, the India economist at Capital Economics. “This bolsters our view that the window for further interest rate cuts has now closed.”
Political bickering stalls reforms
Businesses and investors were awaiting key reforms, in particular a long-delayed goods and services tax (GST). But hopes that the bill would be passed this year faded amid political discord in India’s parliament.
“The country continues to suffer with the overhang of bad economic policies of the previous government and a very stubborn desire of the Congress party to not let the parliament function,” says Satish Modh, the director of the Vivekanand Education Society Institute of Management Studies and Research, based in Mumbai. “Some key legislative reforms like the land bill and the GST bill could not see the light of the day.”
GST is planned as a uniform tax which would replace a convoluted system of varying taxes and fees across India’s 29 states. It is estimated that the introduction of GST could boost economic rate of growth. This would be one of the country’s most significant reforms ever and it is a move that would be widely supported by foreign and Indian investors.
A blow came to prime minister Narendra Modi’s government when the Bharatiya Janata Party lost elections in Bihar in November, leading some to question whether Indians were losing confidence in his business-friendly strategy and promises to turn around the economy. “Investors had unrealistic expectations of the Modi government,” says Mr Malik.
India woos foreign investment
Mr Modi jetted across the world this year to help raise India’s profile as a business and investment destination, with high profile trips to the UAE, the United States, the United Kingdom and China. Plans for much-needed infrastructure, renewable energy, development of smart cities and Mr Modi’s pet project, Make in India, which aims to transform India into a top global manufacturing hub, have all been on the agenda during these visits.
Mr Modi’s trip to the UAE in August resulted in a move by the two countries to create a US$75 billion fund for investment into Indian infrastructures, including roads and railways.
“The government has taken several significant steps for ease of doing business and attracting foreign investment in India,” says Dibyanshu Sinha, an associate partner at Khaitan & Co, one of India’s oldest law firms, which caters to Indian and international clients. “These changes can be considered as the most significant reforms after opening up of the Indian economy in 1991.”
Following the defeat in the Bihar elections, the government in November announced that it was easing foreign direct investment norms in major sectors including broadcasting, aviation, defence and mining. Mr Modi “has set a fast pace of decision making in various industry segments and launched new initiatives which will give boost to manufacturing in the country”, says Mr Modh.
Global technology companies also set their sights on India this year, with visits by Sundar Pichai, the chief executive of Google, Facebook’s Mark Zuckerberg and the Microsoft chief executive, Satya Nadella.
Anuj Puri, the chairman and country head at JLL India, says, “2015 did not bring the hoped-for growth in residential real estate.” But he adds, “However, the silver lining is that the bad days seem to have bottomed out.”
He says that sales have started to pick up in cities including Mumbai, Hyderabad and Bangalore, and that they are showing signs of “slowly but surely crawling back to positive growth”.
New launches of homes have reduced in cities like Mumbai, helping to reduce inventory, according to JLL.
“Developers’ initiatives, like offering attractive schemes and deal terms, coupled with lowering of interest rates by the RBI, have activated fence-sitters,” says Mr Puri.
“The challenges of demand-supply mismatch and high unsold inventory across the country remain, but the signs are nevertheless encouraging.”
India also made a move towards creating a more transparent and far better regulated property market, when the union cabinet earlier this month approved the long-awaited real estate regulation and development bill. This features a range of measures aimed at making India’s property more consumer-friendly, such as the establishment of a real estate regulatory authority and banning developers from changing plans without the consent of buyers. The bill still has to be passed by parliament before it will actually come into effect.
Stock markets and the rupee
Foreign investors sold off a lot of Indian equities this year as they exited emerging markets broadly, leading to sharp gains being wiped out.
“The year 2015 saw Indian stock markets correcting the excess hype created in 2014 of the single largest party coming to power,” says Jimeet Modi, the chief executive of Samco Securities, a brokerage based in Mumbai. “However the pendulum had swung too far above the fundamentals on hopes and expectations and which eventually got corrected in 2015 when markets gave up 17 per cent of the gains from its peak on the back of muted corporate results. However improvement in the sentiments was clearly visible in the form of renewed vigour in the IPO market in 2015.
“The most high profile IPO this year was the Indian airline IndiGo’s $464 million IPO in October, which was six times oversubscribed.
“The policy initiatives have and will show results albeit with a lag which shall the be the main trigger for next year’s roaring bull market supported by RBI induced rate reduction on the back of low inflation and low commodity prices,” says Mr Modi of Samco.
The benchmark Bombay Stock Exchange index reached an all-time high of above 30,000 in March but steadily declined to finish the year trading at under 26,000 this month.
Anand James, the co head of the technical research desk at Geojit BNP Paribas Financial Services, says that investors remain wary, keeping equities under pressure.
“The logjam in the parliament led investors to worry that they may now have to wait at least until the next budget before the stock market gets something to cheer about,” he says. Concerns surrounding emerging market economies and the US dollar’s move higher have led the Indian rupee to come under pressure this year. The rupee hit a more than two year-low, breaching 67 against the dollar this month.