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Economics: India
Economics – Markets – Strategy
IN: Rising growth, inflation
• We forecast above-consensus GDP growth of 8.6% in FY08 and expect
another 25bps increase in rates by Sep08
• Core inflation could remain above the RBI’s comfort level for the next 12
months. It would be a mistake to brush aside inflation readings as “supply
side” or “not domestically led” or merely “basis effects”. The oil price rise is
symptomatic of India’s (and emerging markets’) strong demand
• Consumption, credit and inflation slowed in Jun07-Sep07 due to the sudden
increase in interest rates in the first half of 2007. All three have recovered
sharply since then. The market focus on (declining) year-on-year growth
hides this pattern
• Overall, as long as fuel subsidy shields consumers from higher prices,
stability risks outweigh growth risks as fiscal and current account balances
widen sharply. Another risk is that, due to the central role played by the
software sector in job creation, India may be more dependent on the US
than trade-to-GDP ratios suggest
We expect aboveconsensus
GDP
growth of 8.6% in
FY2008 and
another 25bp
increase in rates
1Q08 GDP review and summary outlook
1Q08 GDP grew by 8.8% (YoY) Chart 1: GDP contributions - select components
much higher than consensus forecast
% YoY
of 8.1%. This meant that fiscal 14
2007 (ends Mar08) growth reached
9%. The break down of the 1Q08 12
GDP shows that consumption 10
spending held up (8.3%) while
investment spending faltered 8
(10.7%). We think the latter is a
logical business response to worries
about US recession. We think these
concerns should decline going
6
4
2
forward. Also, the economic outlook
0
would be more worrisome if the
Dec-05 Dec-06 Dec-07
GDP break down revealed that
consumption had slowed and
investment had held up. This is
because ultimately investment
Consumption
Government
Investment
GDP
outlook depends on consumption outlook. On this count, the 1Q08 GDP was
positive (Chart 1). As such, we continue to expect domestic demand to support
economic growth of 8.6% in FY2008 despite higher prices and rates.
INDIA
Domestic demand supportive but indirect US links via job market a risk
We believe the labour market remains supportive of growth in consumption
spending. Indeed, this is why consumption has stayed remarkably resilient in
the last three quarters despite sudden rates hikes in the first half of 2007 (Chart
2). However, in India, consumer and even business sentiment are quite tied to
the US-dependent software sector. The outlook is, therefore, not without uncertainties.
Ramya Suryanarayanan • (65) 6878 5282 • ramya@dbs.com
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