Thought September 03, 2018 / 02:13 am UTC

India's Solid GDP Growth Is Not All Good News

By Charu Chanana

India's Q1 FY2019 (April-June) GDP growth of 8.2% was encouraging, but the contribution from the private sector is still subdued. We expect the growth momentum to fade as base effects toughen in H2 FY2019 (October-March), which will likely keep the Reserve Bank of India (RBI) on hold for 2018.

The Indian economy grew at a nine-quarter high rate of 8.2% y/y in Q1 FY2019, driven by a surge in private consumption, agriculture and manufacturing. Such strong growth levels are especially noteworthy in an environment of global uncertainty and volatile crude oil prices. 

India's recent growth may be partially attributed to a weak base effect, as there had been a slowdown in Q1 FY2018 due to an inventory de-stocking ahead of the implementation of the Goods and Services Tax (GST). 

Still, we see positive macro-structural changes occurring in India, which are likely boosting fundamentals, and these should aid a more meaningful medium-term recovery if their implementation is ensured. Meanwhile, the external sector remains a drag, and softer investment and services growth may be slight dampeners as well. Growth continues to be government-driven, and private investments are unlikely to grow until the stressed assets issue is closer to resolution and before the election risks subside.

We expect the growth momentum to fade in H2 FY2019 (October 2018-March 2019) as base effects weaken further and election-driven uncertainty picks up. We continue to forecast growth of 7.5% in FY2019, and currently expect no further moves from the RBI in 2018. The Bank is, however, likely to continue a hawkish bias in the medium-term as the Fed and other major central banks wind down quantitative easing, creating ripples in EMs. The rupee is also likely to remain at risk in 2018-19 given the risks from oil prices and global volatility. 

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Analyst Certification
I, Charu Chanana, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.