India Resident Mission

Asian Development Outlook 2015:

Indias Recent Economic Performance &
Prospects

The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the
Asian Development Bank or its Board of Governors or the governments they represent.

Recent Performance

Revised estimates point to growth trending at

higher levels.
10%

Supply Side Contribution to Growth

8%
6%

4%
2%
0%
2012-13
Q1
-2%

2013-14
Q1
Agriculture

2014-15
Q1
Industry

2014-15
Q4

Services

The governments initial estimates for 2014-15 (ending 31 March 2015) show that
economic growth accelerated to 7.4%.
Agriculture growth slipped to 1.1% in 2014-15 largely because monsoon was erratic,
which particularly affected the summer crop.
Industrial growth is estimated to increase to 5.9% in 2014-15, helped by a 6.8%
expansion in manufacturing estimates may be a tad optimistic as they require
manufacturing to grow by more than 10% in Q4 2014-15.
Service sector growth rose to 10.6% in 2014-15 as financial services received a
4
boost from the governments new financial inclusion scheme.

Consumption and investment growth have

witnessed a moderate pick-up.
percentage points
15

Demand Side Contribution to Growth

10
5
0
-5
-10
Q1

Q2

Q3

Q4

Q1

2012-13

Q3

Q4

Q1

2013-14

Q2

Q3

Q4

2014-15

Private consumption expenditure

Government consumption expenditure

Gross fixed capital formation

Others (Valuables, CIS, SD)

Net exports

GDP

Private consumption growth picked up to 7.1% in 2014-15.

Q2

Declining oil prices:

Weakening food inflation;
Improved job prospects;
Stabilization of currency;

Despite the policy momentum toward resolving issues that have constrained
investment, growth in capital formation inched up only to 4.1% in 2014-15.
While the pace slowed as the year progressed, the initial estimates point to recovery
5
in the last quarter of 2014-15.

Domestic and global factors helped inflation to

moderate to low levels.
Inflation

% change, year on year

16

Policy Interest Rates

15

Reverse repo rate

Marginal standing facility rate
Real Interest Rate

12
12

Repo rate
Interbank call money rate

6
8
3

Core consumer price index (excluding food and fuel)

Consumer price index

0
-3

Food consumer price index

-6

0
Jan
2012

Jul

Jan
2013

Jul

Jan
2014

Jul

Jan
2015

2012

2013

2014

2015

Consumer price inflation fell sharply over the course of the year to average well below 7% in
2014-15.
Food inflation moderated considerably, helped by a limited increase in MSP, muted rural wage
growth, and the governments offloading of food stocks.
A sharp drop in global oil prices helped moderate fuel inflation, though hikes in excise duty
limited the pass-through of decline in global oil prices to domestic retail prices.
RBIs strong anti-inflationary stance and the declining trend in the fiscal deficit bode well for core
inflation, which dropped to below 5%.
The quality of bank assets continues to be a matter of concern, with the ratio of NPAs to total 6
advances increasing to 4.5%, and the ratio of restructured loans growing to 6.2%.

Compression of expenditure helped attain the fiscal

deficit target.
% of GDP

Central Government Budget Indicators

20
Tax

Nontax

15.4

Other

14.5

15

Non-plan

13.9

13.7

10.6
10

Deficit

13.3

12.6

9.2

9.3

9.0

8.8

Plan

8.7

5
0
-5

-3.9

-4.1

-4.4

-4.9

-5.7

-4.8

-10
R

E
2010

E
2011

E
2012

E
2013

E
2014

2015

The central governments budget deficit is estimated at 4.1% in 2014-15, below the
4.4% recorded in 2013-14.
While most major tax revenue segments underperformed their original targets, growth
in corporate and service taxes was especially subdued.
Receipts from asset sales increased in Q4 2014-15 but still fell well below target.
Expenditure grew by 7.8% in FY2014, less than the targeted 12.9%.
However, much of the burden of expenditure compression fell on capital expenditure, 7
which grew by 2.5%, only a fraction of the 20.8% growth target.

Current account deficit has moderated sharply

while capital flows remained buoyant.
$ Billion

Trade and Current Account Indicators

International Reserves

% of GDP

400

200

$ billion
350

Foreign exchange reserves

300

-200

-4

-400

-8 250

-600
2010
2011
Oil exports
Oil imports
Current account deficit

2012
Nonoil exports
Gold imports

2013

Gold and special drawing rights

-12
2014
200
Nonoil and gold imports
Jan
Traded deficit
2011

Jan
2012

Jan
2013

Jan
2014

Jan
2015

After moderating to 1.7% of GDP in 2013-14 from record heights in the previous 2 years, the
current account deficit is estimated to have narrowed further to 1.5% of GDP in 2014-15.
Oil imports, which account for nearly one-third of all imports, contracted as global prices fell
sharply while relaxation of restrictions on gold imports imposed in 2013 spurred gold imports.
Export growth moderated in 2014-15 driven by slowdown in PRC and EU impacting external
demand, and declining oil prices affecting export of refined petroleum products.
A decisive election result, improved fiscal and current account deficits, and movement toward
resolving structural bottlenecks buoyed investor sentiment and foreign capital inflows.
FDI revived on improved growth prospects, while low interest rates in advanced economies
aided ECBs.

Economic Prospects

A further pickup in economic growth would be

contingent on accelerated investment.
Rs trillion
20

Investment Projects Announced and Dropped

15

New investment projects announced

Investment projects dropped

10

0
2009

2010

2011

2012

2013

2014

Prospects of a pickup in investment growth look promising, though significant

challenges remain.
Investor sentiment should improve with measures to remove bottlenecks to
investment: expediting environment and forest clearances, easing land acquisition for
infrastructure and industrial corridors, allowing auction of coal mines to the private
sector, and easing the burden of compliance with labor laws for SMEs.
The Project Monitoring Group set up in mid-2013 to facilitate clearances for large
infrastructure projects has cleared projects worth $105 billion, equal to 4.8% of GDP.
Announcements of new projects in the quarter ending December 2014 reached their
10
highest number in over 4 years, although dropped projects continued to increase.

Industry is likely to record an uptick in growth.

Index
60

Index

Industry Outlook Survey

Purchasing Managers Indices

60

Indicates expansion
30
50
0

-30
Q12008

40

Q12009

Q12010

Q12011

Q12012

Q12013

Q12014

Business situation

Order books

Financial situation

Employment

Profit margin

Capacity utilization

Jan
2012

Jan
2013
Manufacturing

Jan
2014
Services

Jan
2015

The RBIs Business Expectation Index continued to strengthen, reaching a 2 year

high in December 2014 indicating improved sentiment on production and exports.
The HSBC India manufacturing purchasing managers index rose in December 2014
to its highest in over 2 years before slipping a bit in January and February 2015.

11

GDP Growth Prospects

GDP Growth Rate

2014-15

2015-16f

2016-17f

7.4%

7.8%

8.2%

f: forecast

Revival of investment helped by clearances given by PMG and improving investment

climate.

Mining clearances and auctions of coal mines will provide a fillip to mining and
electricity generation.

Manufacturing will receive a boost from the governments Make in India program,
which will induce businesses around the world to invest in manufacturing by
providing infrastructure and streamlining regulations.

A benign inflation outlook would serve to help monetary policy support growth.

A pickup in growth in the advanced economies would provide a boost to tradable

services like finance, software design, and business services.

12

Inflation is expected to remain at low levels.

Consumer Price Inflation

2014-15

2015-16f

2016-17f

6.0%

5.0%

5.5%

f: forecast

Consumer inflation is expected to decline further in 2015-16 as inflation is restrained

by muted hikes in rural wages and MSPs and by the governments offloading of excess
stocks.
With control on petrol and diesel prices lifted, domestic fuel inflation will be largely
determined by global oil price movements --- the expectation of crude oil prices being
about $65 per barrel in 2015 bodes well for fuel inflation..
After rising by double-digits for nearly 5 years, inflation expectations of households
dropped to around 9% in December 2014 --- help moderate core inflation.
Inflation is likely to pick up marginally in 2016-17 as global oil prices firm and improved
economic prospects lift demand.
With the new monetary policy framework focusing more on inflation, aggressive
interest rate cuts are unlikely.

13

Fiscal consolidation appears credible but

actual outcome needs to be assessed.

The government set a fiscal deficit of 3.9% of GDP for 2015-16, pushing back the
medium-term fiscal deficit target of 3.0% by a year to 2017-18.

The adjustment allows additional spending that will fund larger infrastructure
investment.

Tax revenue is projected to grow at 15.8%, helped by hikes in rates for customs duty
and excise and service taxes.

The disinvestment target of 0.5% of GDP could be on the ambitious side, given the
failure of the government to meet the 2014-15 target despite a buoyant stock market.

The expenditure mix is expected to improve significantly, with capital expenditure

growing by a robust 25.5% --- bodes well for capital expenditure, which in 2014-15
fell to 1.5% of GDP, the lowest in more than a decade.

The decline in subsidies from 2.1% of GDP to 1.7% is largely on account of fuel
subsidies --- helped by lower global oil prices, decontrol of diesel prices and plugging
leakages through cash transfers.
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Current account deficit is expected to remain subdued

and comfortably financed.
Current Account Deficit

2014-15

2015-16f

2016-17f

1.5%

1.1%

1.5%

f: forecast

Imports are likely to contract in 2015-16 and increase a bit in 2016-17

With global oil prices expected to be about 35% lower in 2015 than in the previous year, oil imports are
expected to significantly contract in FY2015.
Gold imports are likely to increase with the removal of restrictions imposed in 2013, but the extent will be
limited by positive real interest rates, lower inflationary expectations, and reduced incentives to hoard
gold.
Accelerating economic activity would push up non commodity imports.

Export growth is expected to improve as global growth momentum improves and

moderating inflation boosts competitiveness.
Higher growth prospects in the advanced economies will boost remittance inflows.
In 2016-17, the current account deficit will expand to 1.5% as recovering oil prices
raise oil imports.
Improved growth prospects and stable currency will continue to attract portfolio flows
although debt utilization status could be an issue.
Net FDI inflows are likely to increase on better growth prospects, liberalized ceilings15
in several sectors, and the focus on improving the ease of doing business.

Thank You!

16