MNI ANALYSIS: Strong Indian Growth Looks Here To Stay

--India FX And Bond Sell-Off Not Seen Sustainable

By Stuart Allsopp

     SINGAPORE (MNI) - India's rapid real GDP growth of 7.2% y/y seen in the

third quarter of fiscal year 2018 is likely to be sustained into fiscal 2019

thanks to the government's infrastructure drive, along with a surge in

profitability as the Goods and Services Tax and demonetisation headwinds fade,

allowing a pickup in capex. The sell-off in the Indian rupee and bond yields is

unlikely to continue, given the improving outlook.

     Two negative developments seen in the economy over the past month -- the

high-profile bank fraud at state run Punjab National Bank and the government's

decision to increase import tariffs to support domestic manufacturing -- pose

varying degrees of risks, but are unlikely to prevent growth from exceeding

7.0%.

--CONSOLIDATION ON BACK BURNER

     Strong growth momentum in the manufacturing and construction sectors

suggests that headline growth will likely continue to outperform the rest of the

region, with the government's infrastructure push a key supportive near-term

factor. The government is letting its fiscal consolidation efforts take a

temporary back seat in favour of boosting transport infrastructure, which will

contribute positively to headline real GDP.

     With the teething issues surrounding GST implementation and the

demonetisation campaign having being almost fully worked through, corporate

earnings have surged and this should provide a solid platform for increased

gross fixed capital formation. GFCF expanded by 12.0%y/y in the third quarter

and is likely to end fiscal year 2018 on a strong note.

--PNB NOT GROWTH THREAT

     The PNB scandal has hit investor confidence as seen by the underperformance

of the Indian rupee and equities, and Goldman Sachs on Mar 20 shaved 0.4pp from

its real GDP growth forecast for the upcoming fiscal year. The reason given was

that an anticipated tightening of banking sector regulations would impede the

recovery in credit growth seen over the past year.

     However, low loan growth tends to be little impediment to real GDP growth

outside of periods of outright banking crises. India's real GDP growth saw a

strong accelerating trend from 2012 to 2016 while credit growth consistently

slowed. With loan growth coming in at 11.5% y/y in February there appears to be

no shortage of new liquidity to facilitate strong growth. Increased regulation

should actually help to improve resource allocation among India's state-run

banks, helping to boost productivity.

--TRADE ISSUES

     The increase in import tariffs, on the other hand, represents a more

pertinent risk to real GDP growth, although from a longer-term perspective. Even

assuming that retaliatory measures are not taken by India's trade partners, the

decision to impose tariffs on a wide range of industrial products to support its

'Make in India' campaign will ultimately be negative for productivity and thus

corporate profitability and economic growth. Any gains received by domestic

manufacturers will most likely be more than offset by losses in other industries

reliant on imports.

--REFORM A BOON

     At this stage, such measures do not appear to mark a change in tack by the

central government regarding its goal to improve economic freedom and roll back

regulations, and we therefore do not expect to see the trend of a weakening

rupee and rising bond yields continue. That said, a move towards further

protectionist policies would be a negative signal. 

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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