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Economy report after one month of Modi government: Growth looks up, inflation cools
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NEW DELHI: The first full month under the Narendra Modi government's watch turned out to be a good one for the economy with macro indicators looking up and inflation lower despite lingering monsoon doubts, suggesting that growth could have finally bottomed out.
Exports rose 10.2% in June from a year ago, the government said on Wednesday, marking yet another positive development following a series of good numbers in recent days that suggest the economy is picking up from decade-low growth rates in the past two years.
Industrial production rose to a 19-month high of 4.7% in May while car sales rose at their fastest pace in 10 months in June, clearly indicating that the consumer was more confident of the new government shaping recovery.
Services activity rose to a 17-month high in June on the strength of robust order flow, according to the HSBC Purchasing Managers' Index, indicating rising optimism in the sector that has a share of more than 60% in the economy.
Imports rose for the first time in a year, at around 8.3%, confirming some sort of recovery in the domestic economy even after discounting for higher gold imports, which rose nearly 65% in June after the Reserve Bank of India eased rules by allowing more entities to import gold.
India's other big concern, retail inflation, dropped to 7.31% in June, the lowest since the government started reporting consumer price index inflation in January 2012, although the monsoon fears loom large.
And to top it all, the trade deficit was $11.78 billion in June, the highest in a year, but only marginally more than $11.28 billion in May, according to data released on Wednesday by the commerce department.
Markets cheered the development, with the Sensex rising 1.27% to 25,549.72 points. "The export data is very encouraging, especially the fact that it is led by robust performance of engineering goods, indicating a productivity revival. Given that non-oil, non-gold imports have shown an uptick, industrial production for June will also be quite strong," said Soumya Kanti Ghosh, chief economic advisor, State Bank of India BSE -0.32 %.
"One can say looking at car sales, manufacturing and exports data that the economy may well have finally bottomed out." That will bode well for the Modi government, which has pledged to turn the economy around while bringing prices under control. The economy could begin the first quarter of the current year at near-5% growth, up from 4.6% in the January-March quarter.
The decline in global commodity prices will also act as a booster although Iraq and Ukraine are geopolitical sore spots with the potential to reverse the trend. Meanwhile, the June-September monsoon has been patchy although rains have picked up in the past two days.
A poor monsoon could wreak havoc on prices, something that will force the Reserve Bank of India to keep up the pressure on interest rates at its August 5 policy announcement, although both wholesale and retail inflation slowed sharply in June.
Higher exports will provide further support to industrial production that was up 4.7% in May, a 19-month high, which will be welcomed by the government for its positive effect on jobs.
Engineering exports grew 21.5% to $54 billion while those of readymade garments expanded 14.3% and leather 38.37%. "We are getting higher orders from the US — so much so that our domestic manufacturing infrastructure is not able to support the same," said Engineering Export Promotion Council Chairman Anupam Shah.
This suggests growth may remain strong in the coming months, but some analysts struck a cautious note. "Export growth is expected to be moderate in the coming months, reflecting external demand conditions, a waning of the favourable base effect and relative stability in the nominal exchange rate," said Aditi Nayar, senior economist, ICRA.
"The unfavourable monsoon conditions suggest agricultural exports would be muted in 2014-15." Services showed a trade surplus of $5.8 billion in May.
Rohini Malkani, economist at Citigroup, said her view on the current account deficit was unchanged. "With the 1QFY15 trade deficit at $33.2 billion vs $28.2 billion last quarter, we maintain our view of FY15 CAD remaining at sub-2% of GDP, leading to a BoP (balance of payments) surplus of $33 billion and consequently INR in a 59-62 range," against the dollar, she said in an emailed release.
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Exports rose 10.2% in June from a year ago, the government said on Wednesday, marking yet another positive development following a series of good numbers in recent days that suggest the economy is picking up from decade-low growth rates in the past two years.
Industrial production rose to a 19-month high of 4.7% in May while car sales rose at their fastest pace in 10 months in June, clearly indicating that the consumer was more confident of the new government shaping recovery.
Services activity rose to a 17-month high in June on the strength of robust order flow, according to the HSBC Purchasing Managers' Index, indicating rising optimism in the sector that has a share of more than 60% in the economy.
Imports rose for the first time in a year, at around 8.3%, confirming some sort of recovery in the domestic economy even after discounting for higher gold imports, which rose nearly 65% in June after the Reserve Bank of India eased rules by allowing more entities to import gold.
India's other big concern, retail inflation, dropped to 7.31% in June, the lowest since the government started reporting consumer price index inflation in January 2012, although the monsoon fears loom large.
And to top it all, the trade deficit was $11.78 billion in June, the highest in a year, but only marginally more than $11.28 billion in May, according to data released on Wednesday by the commerce department.
Markets cheered the development, with the Sensex rising 1.27% to 25,549.72 points. "The export data is very encouraging, especially the fact that it is led by robust performance of engineering goods, indicating a productivity revival. Given that non-oil, non-gold imports have shown an uptick, industrial production for June will also be quite strong," said Soumya Kanti Ghosh, chief economic advisor, State Bank of India BSE -0.32 %.
"One can say looking at car sales, manufacturing and exports data that the economy may well have finally bottomed out." That will bode well for the Modi government, which has pledged to turn the economy around while bringing prices under control. The economy could begin the first quarter of the current year at near-5% growth, up from 4.6% in the January-March quarter.
The decline in global commodity prices will also act as a booster although Iraq and Ukraine are geopolitical sore spots with the potential to reverse the trend. Meanwhile, the June-September monsoon has been patchy although rains have picked up in the past two days.
A poor monsoon could wreak havoc on prices, something that will force the Reserve Bank of India to keep up the pressure on interest rates at its August 5 policy announcement, although both wholesale and retail inflation slowed sharply in June.
Higher exports will provide further support to industrial production that was up 4.7% in May, a 19-month high, which will be welcomed by the government for its positive effect on jobs.
Engineering exports grew 21.5% to $54 billion while those of readymade garments expanded 14.3% and leather 38.37%. "We are getting higher orders from the US — so much so that our domestic manufacturing infrastructure is not able to support the same," said Engineering Export Promotion Council Chairman Anupam Shah.
This suggests growth may remain strong in the coming months, but some analysts struck a cautious note. "Export growth is expected to be moderate in the coming months, reflecting external demand conditions, a waning of the favourable base effect and relative stability in the nominal exchange rate," said Aditi Nayar, senior economist, ICRA.
"The unfavourable monsoon conditions suggest agricultural exports would be muted in 2014-15." Services showed a trade surplus of $5.8 billion in May.
Rohini Malkani, economist at Citigroup, said her view on the current account deficit was unchanged. "With the 1QFY15 trade deficit at $33.2 billion vs $28.2 billion last quarter, we maintain our view of FY15 CAD remaining at sub-2% of GDP, leading to a BoP (balance of payments) surplus of $33 billion and consequently INR in a 59-62 range," against the dollar, she said in an emailed release.
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