Slow growth set to follow short-term slowdown
India’s economy slowed further in Q4 2012. Annual growth was 4.5% year-on-year, down from 5.3% in Q3. Held back by weak external and domestic demand, the manufacturing sector grew by just 2.5%, while the pace of services expansion also slowed markedly, to 6% from 7.1% in Q3.
Looking ahead, we still expect momentum to build slowly this year. External demand is forecast to recover, with growth in the US and China set to accelerate. And domestic demand will benefit from a moderation in inflation and lower interest rates. The Indian Reserve Bank cut rates by 25bp at each of its last two monetary policy meetings. But a challenging investment climate coupled with the weak finish to 2012 means that we now expect growth of 5.2% in 2013 – a downgrade from our previous forecast of 6%.
The pace of growth should accelerate over the medium term, supported by India’s favorable demographics and the government’s recent reforms, which will allow foreign firms access to the retail, airline and financial sectors. But strong political and interest group opposition may result in these reforms stuttering. More infrastructure investment is required and delivery mechanisms need to be made more efficient. If all of this can be achieved, annual trend growth could rise to at least 8%, up from our current forecast of 7%. p.a.
HSBC manufacturing Purchasing Managers’ Index (PMI)
Source: Markit.
Interest rate and wholesale price index inflation
Source: Oxford Economics.
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