India: Economy

The weak monsoon, flagging external demand, and stalled parliamentary action on structural reforms, including a revamped domestic tax system and eased restrictions on land acquisition and labor, are expected to slow India’s economy. With growth in the industrial economies falling short of earlier assumptions, growth forecasts are revised down for both financial year 2015 and 2016.

Selected economic indicators (%) 2015 2016
ADO 2015 Update ADO 2015 Update
GDP Growth 7.8 7.4 8.2 7.8
Inflation 5.0 5.0 5.5 5.5
Current Account Balance (share of GDP) -1.1 -1.1 -1.5 -1.5

Source: Asian Development Outlook 2015; Asian Development Outlook 2015 Update

Economic performance

India’s Gross Domestic Product (GDP) growth slowed to 7.0% in the first quarter of financial year (FY) 2015 (ending 31 March 2016) from 7.5% in the last quarter of FY2014. The deceleration was broad-based, with private consumption, manufacturing, and services all experiencing slower growth. However, expansion in fixed investment picked up to 4.9% from 4.1% in the previous quarter, indicating a continuing gradual recovery in capital expenditure. Agriculture grew by 1.9%, but monsoon rainfall that has been 12% below normal crimped the summer crop planted area.

Low global oil prices, a positive base effect, and tight monetary policy kept consumer price inflation benign at an average of 4.8% in the first 4 months of FY2015. Core inflation has trended downward for nearly 2 years and now hovers just above 4%.

The current account deficit in the first quarter of FY2015 improved to 1.2% of GDP from 1.6% a year earlier, helped by moderate monthly trade deficits and lower net outflows from the primary income account.

Economic prospects

Consumer inflation is likely to remain within the central bank and government target of 4% more or less 2 percentage points. The inflation forecast remains in line with the forecast in ADO 2015, while an uptick in prices for commodities, including crude oil, are expected to boost inflation in FY2016. With the projected 37% decline in the average crude oil price, the import bill is expected to shrink by about 10% in FY2015.

The slump in exports in the first quarter is likely to continue with listless global demand and a drop in exports of refined oil products. On balance, the current account deficit in FY2015 is expected to be significantly narrower than in recent years. Some recovery in oil prices and improved demand for industry and investment will likely push import growth to 8.0% in FY2016. Exports are also likely to recover, growing by 3.5% as higher petroleum prices boost the value of exports of refined petroleum products and as external demand improves. Accordingly, the current account deficit is expected to widen marginally in FY2016.

Excerpted from the Asian Development Outlook 2015 Update.