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India: No decisive policy response expected, despite marked growth slowdown

GDP growth slowed to 5.3 % in Q1: lower than the consensus expectations of 6.1% and the fourth consecutive quarter of slowing growth (Chart 1). The rate is now slower than during the 2008-2009 financial crisis. The deceleration was led by the manufacturing sector, but agricultural production and mining were also weak. This weak growth is largely self-inflicted and is a result of political stalemate and policy paralysis. No decisive policy response or improvement in the reform climate is expected until after the May 2014 parliamentary election. Furthermore, the Reserve Bank of India (RBI) has limited room for rate cuts due to stubborn inflation. Due to much weaker than expected growth in Q1, Indias inability to counter the slowdown with economic policy initiatives and increasing global economic uncertainty, we cut the GDP forecast to 6.0% in 2012 (from 7.0%) and to 6.6% in 2013. Purchasing managers indices (PMIs) for both manufacturing and services have stabilised recently (Chart 2) but figures are still below the long-term average. Industrial production is decelerating. In March, production was 3.5% below the level of a year earlier (Chart 3). High interest rates are harming investment. Export growth has slowed, and in April the year-on-year increase was only slightly above 3%. Imports are also decelerating (Chart 4). Car sales are decelerating, indicating that domestic demand is weakening (Chart 5). Wholesale price index (WPI) inflation rebounded to 7.2% in April; food inflation is above 10% (Chart 6). The RBI is in a tricky position due to the marked growth slowdown and stubborn inflation. The central bank cut its key interest rate by 50 basis points in mid-April (Chart 7). We expect a further cut of 50 basis points in Q3. There is significant downward pressure on the rupee due to weak fundamentals and growing global economic uncertainty (Chart 8). Indias current account deficit continues to weigh down the rupee (Chart 9).

TUESDAY 5 JUNE 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

Key data Percentage change

2010 2011 2012 2013 GDP* Inflation (wholesale)* USD/INR** 10.6 9.6 44.7 7.2 9.5 53.0 6.0 6.8 52.0 6.6 7.2 50.0

* Percentage change. ** End of period. Source: IMF, Ministry of Commerce and Industry, Reuters, SEB.

Economic Insights


Chart 5: Domestic car sales are weakening

Year-on-year percentage change
70 60 50 40 30 20 10 0 -10 -20 -30 05 06 07 08 09 10 11 12
Source: SIAM

70 60 50 40 30 20 10 0 -10 -20 -30