Weak global growth to weigh on India

Slowing exports and higher oil prices could widen our CAD in FY16; US Fed's likely rate move another risk

India is not the only country faced with a very gradual recovery in growth. The US  and China both reported weaker than estimated real Gross Domestic Product (GDP) growth rates for the March quarter, implying that global growth is going to take a lot longer to bounce back.

The US economy expanded 0.2 per cent in the March quarter against the 2.2 per cent growth in the December one. China’s real GDP growth slowed to seven per cent in the March quarter, as industrial production growth slumped to 5.6 per cent, the slowest since 2009.

The sharp slowing in the US and China makes the situation more complex for other exporting countries in Asia, including India. Given the growth challenges in the US, consumption might not grow at the pace it was expected to, which would impact exports of Asian countries. HSBC Global Research believes the outlook for India’s exports in 2015 is not very encouraging, as global growth remains lethargic and the pace of removing domestic bottlenecks remains gradual. Exports are likely to pick up only in 2016.

Given the slowing in exports and rising oil prices, India’s current account deficit might widen to 1.5 per cent of GDP in FY16 against 1.3 per cent in FY15. Weaker exports could impact GDP growth negatively by 40 basis points. Economists across investment banks have revised India’s GDP growth estimate downwards to 7.6 per cent from the earlier one of eight per cent.

Historically, a pick-up in industrial activity is driven by exports. With the state of the global economy, this does not seem a distinct possibility in FY16. Macquarie Capital says global industrial production, a key determinant of commodity demand, continued to see only modest growth in the March quarter, helping to explain weak bulk commodities and industrial metal prices. “While activity should pick up on a cyclical basis, the secular decline in Chinese growth will remain a drag.”

Though India’s external sector has improved since 2013, a lift-off by the US Federal Reserve continues to be a risk. Nomura feels some caution is warranted ahead of a rate rise by the US Fed, as India has received substantial portfolio debt inflows in the past year and a reversal in these would put pressure on the currency and external situation.

The risk of a rate increase by the US is not on the wane despite the muted growth in the March quarter. Economists believe the Federal Reserve would look at raising rates no later than September. Macquarie, which has shifted its base case for a rate rise to September from June, says: “Despite the shift in our base case, we continue to see risks pointing towards an ‘earlier than September’ date, rather than a ‘later than September’ date.”