DURING India’s 2014 elections, Prime Minister Narendra Modi, promised to boost the economy if he was elected. Over a year has past since his landslide win, and recent figures indeed show high GDP growth of 7.0% YoY in Q2, but there are serious concerns that the growth is overstated due to the new official methodology for calculating the country’s GDP. Several changes in the calculation were introduced during this period, such as using consumer prices instead of production costs, the introduction of surveys to account for non-listed companies and the change of the base year. As a result, India became the fastest-growing relevant economy “on paper” overnight, which generated a great deal of controversy. The new GDP growth is structurally higher than the old version, by 1.5 percentage points on average for the two years in which the two datasets are available. However, the new series has not registered any significant improvement in the last year. There seems to be no economic miracle for the time being.
Other well-understood economic indicators need to be analyzed to assess India’s economic performance. Car sales for instance seem to have recovered from their weakness, from an average 2.8% YoY in the second half of last year to 7.4% YoY in the first six months of 2015. Industrial output has also improved, from 1.5% YoY to 3.4% YoY on average in the same period.
Manufacturing and services PMI have remained above the no-change threshold, with readings of 52.3 and 51.8 in August, suggesting a moderate expansion. Another good measure to assess the evolution of the Indian economy is tax revenue, which should be correlated with the targeted sectors. Corporate tax revenue growth fell sharply in the first six months of 2015 (-6% YoY on average) while income tax return growth remained broadly steady, at 3.5% YoY. However, revenue coming from the service tax actually accelerated, from an average 8.5% YoY in the last six months of 2014, to 11.1 % in the first half of this year. Overall, economic indicators are mixed, and do not seem to suggest a significant pickup in the Indian economy.
Important economic reforms are still to be approved more than a year after Modi’s election. Two of these important legislative changes are the land acquisition bill and the implementation of the goods and services tax (GST). The first reform is key in order to release land for industrial and infrastructure projects. Currently this reform is under amendment, as it has been labeled as anti-poor and anti-farmer by the main opposition party. The implementation of the GST is also crucial. It aims at replacing all indirect taxes, substantially reducing bureaucracy, and helping unify the Indian market. Currently, the government is seeking support from Congress to pass the bill, but recently has complained about the absence of “positive signals”. These two reforms have the potential of boosting investment in India on their own, but so far it is highly uncertain whether the government will succeed at approving them.
While some factors may pose a threat to the economic outlook, current conditions offer great opportunities. The moderation in food inflation allowed for policy rate cuts, which set an appropriate environment to boost investment and consumption. However, a potential pickup in energy and commodity prices could fuel inflation in India. The weakness in global growth, led by the deceleration in China, could also represent a disincentive to invest, but the two main export destinations are the US and the EU, which are experiencing a resilient recovery. Overall, conditions are right for India, and the government needs to deliver the necessary reforms for economic growth to thrive in the medium term.