India's GDP growth premium over EMs to hit 7-year low of 1.1%: IMF

The relative attractiveness of India’s growth story is fast fading as the pace of economic slowdown in India exceeds the rest of the world (RoW). 

According to the latest data from the International Monetary Fund, India’s growth premium over the emerging economies (EMs) will hit a seven-year low in 2019-20 (FY20) and an 18-year low against the developed economy, including the US.

India’s gross domestic product (GDP) at constant prices is expected to grow by 5 per cent in FY20, against 3.9 per cent growth in EMs in the calendar year (CY) 2019. Given this, India’s growth premium over EMs in FY20 is expected to be the lowest since 2012-13, when it had shrunk to 0.1 per cent. 

In the past two years, GDP growth in India is down nearly 220 basis points (bps, or bips), against growth deceleration of 85 bips in EMs. One basis point is one-hundredth of a per cent.

Growth deceleration in India looks worse, compared to the developed economies of Europe, North America, and Japan. Developed economies and the US are expected to grow by 1.7 per cent and 2.35 per cent during CY18, down just 80 bips and 2 bips, from the highs of CY17.  At 330 bips in FY20, India’s growth premium over developed economies is likely to be the lowest since FY2002-03, when it had hit a low of 210 bips.

Economic deceleration in India has begun to worry analysts, as it could impact capital inflows, the value of the Indian rupee against other major currencies, and ultimately the stock prices on Dalal Street. The decline in capital flows could also make it tough for India Inc to raise fresh capital.

“I think the India story is still powerful enough to attract global capital. It shouldn’t so happen that we have another round of sustained inflation along with currency volatility and our real growth differential comes off, then we are losing one of the more potent variables we have had so far,” said Sachchidanand Shukla, chief economist at industrial group Mahindra & Mahindra.

Analysts also raise the issue of slower demand growth in India, credit issues, currency fluctuations, and inflation.

Manishi Raychaudhuri, head of equity research (Asia Pacific) at foreign brokerage BNP Paribas, said that small fluctuations in currency are unlikely to deter foreign investors, though sharp moves can have an impact.

“For that kind of a depreciation, which is about 2.5-3 per cent every year, we are fine. I don’t think anyone cares. If it goes beyond that, like in 2013 or even during the Infrastructure Leasing & Financial Services (IL&FS) crisis, that is when we have a problem,” said Raychaudhuri.

Historically, the Indian rupee has depreciated in periods of relatively poor economic growth in India and had shown tendency to appreciate in periods when economic growth in India exceeded the RoW by a wide margin. Foreign investors prefer stable to appreciating currency regimes. 

The rupee had depreciated during 2013 on tightening global liquidity conditions. It had also fallen after the collapse of lender IL&FS in 2018. He had noted, however, that global central banks are likely to keep liquidity conditions benign in the current environment, which is likely to drive foreign investors to EMs like India in search of higher yields.

Analysts say the government’s room to push domestic levers of growth may be limited. “The government can do very little, given the fiscal (constraints)…What it can do probably is go in for a higher fiscal deficit and use it on capital expenditure rather than tax cuts,” said CARE Ratings Chief Economist Madan Sabnavis.

The benefits of tax cuts are contingent on the persons receiving them and how they put it to use, he said. One positive for higher government spends is that the recent inflation spike may well be one-off. 

Shukla said that the current spike in inflation to 7.35 per cent is not as worrisome as the headline numbers would suggest. Cyclical factors associated with excess and untimely rains and supply disruptions have been at play. Core inflation (which excludes food and fuel prices) remains low and stable. He expects food inflation to begin cooling off from March.