India's bright GDP growth just a small step in long road to sustained revival

Sep 03 2014, 09:59 IST
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Consumers power nearly 60 percent of the economy, so getting them to spend more is essential for India to end its longest spell of sub-5 percent growth in a quarter of a century. (Reuters) Consumers power nearly 60 percent of the economy, so getting them to spend more is essential for India to end its longest spell of sub-5 percent growth in a quarter of a century. (Reuters)
SummaryDespite growth data being trumpeted by PM Modi, a broader, lasting upturn appears some way off.

Optimism that sunny growth figures herald an economic revival in India is probably misplaced - in fact there is little hard evidence to support the idea that Asia's third-largest economy is heading for a broader and sustained rebound anytime soon.

India's economy grew 5.7 percent in the June quarter compared with a year earlier, the strongest pace in 2-1/2 years, accelerating from 4.6 percent in the March quarter thanks to a rebound in industrial activity.

But the encouraging headline numbers masked the deeper malaise gripping the economy, which is being hobbled by slack consumption, weak business investment, creaking infrastructure and painfully slow structural reforms, economists say.

"The uptick in GDP growth was mainly driven by front-loading of government expenditure," says Izumi Devalier, an economist with HSBC in Hong Kong. "A curtailment in expenditure will make it challenging to sustain this pace of growth."

Prime Minister Narendra Modi, who won power in May's general election with a promise of "good times", trumpeted the growth data on a visit to Japan, saying it had "generated huge positive sentiment".

And economists at Citi declared after the GDP figures that the recovery was a matter of when, and not if: "While there is plenty of debate on pace and timing, India is on its way back to 7 per cent growth and 6 per cent inflation."

But there is a difference between sentiment and ground reality. Based on the evidence at hand, Modi's goal of scripting a broader, lasting upturn appears some way off.

Much of the growth in the last quarter came from robust government spending, the pace of which could slow down as Finance Minister Arun Jaitley seeks to stick to this year's ambitious fiscal deficit target of 4.1 percent of gross domestic product.

A pickup in private spending could help offset the slowdown in government spending. But stubborn inflation, which at nearly 8 percent is too high for the Reserve Bank of India to cut policy rates, and weak employment are hurting consumers.

The HSBC purchasing managers' index (PMI) for manufacturing in August showed no improvement in employment or inflation, clouding the consumer outlook.

A late monsoon and coal supply crunch that has depleted fuel supplies to just six days of forward cover at India's thermal power stations could undermined rural spending and constrain output at energy-intensive businesses.

CONSUMER CONFIDENCE

Consumers power nearly 60 percent of the economy, so getting them to spend more is essential for India to end its longest spell

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