Indian Economy
The broad-based decline in retail inflation since September 2014, plans announced in the Union Budget to step up infrastructure investment, depressed commodity prices and upbeat financial market conditions have improved the prospects for growth in 2015-16. The macroeconomic environment is expected to improve further this year, with fiscal policy gearing to an investment-led growth strategy and monetary policy using available room for accommodation.
- Demand & output: Domestic economic activity firmed up in 2014-15, spurred by a pick-up in manufacturing and services. GDP growth rate projections for FY16 are between 7.5% & 8% with Economic Survey putting it at 8.1%. However more evidence is needed to suggest a clear ‘break-out’ of economic activity and key macroeconomic indicators still point to the presence of considerable slack in the economy.
- Inflation: Retail inflation is projected to remain below 6% in FY16, the target set for January 2016. Continued slack in the economy and restrained input costs should continue to help control inflation. Going forward, any disruptions/reversals in global commodity prices, especially oil prices, and/or deficiency in the monsoon are the major risks.
- Financial Markets: Amidst abundant global liquidity and fluctuations in investor risk appetite, financial markets have rallied strongly, supported by improvement in domestic macroeconomic conditions. Liquidity was comfortable in all segments and this was reflected in a pick-up in turnover, softening of interest rates, an appreciating bias in the exchange rate and equity markets scaling historic highs.
- External Environment: The recent quarters saw India benefitting from unexpected trade gains lead by fall in global commodity prices and lower import prices due to slow down in advanced economies. Further, as data from the US reduced fears of early monetary policy normalisation and accommodative monetary policies took hold in Europe, Japan and China, the risk appetite for India went up and this got reflected in higher capital inflows.
Global Economy
Global economic recovery remained subdued and divergent across economies, with most emerging market economies (EMEs) experiencing slowdown. While advanced economies (AEs) remained susceptible to the risk of deflation, softening of inflationary pressures in key EMEs gave support for easing monetary policy, including India. Global commodity prices continued to decline. Financial markets were largely buoyant but volatile due to uncertainty regarding policy developments in major economies.
- Global growth: The global growth is projected to reach 3.5% and 3.8% in 2015 and 2016, respectively as per IMF. The projection for 2015 is stronger relative to 2014 in AEs, but weaker in EMEs, reflecting more subdued prospects for some large EMEs and oil exporters. Growth in EMEs is expected to decline to 4.3% in 2015 from 4.6% in 2014 while the growth in AEs, is expected to strengthen to 2.4% in 2015 from 1.8% in 2014.
- Asia: Broadly, the growth outlook has been revised downwards for Asia. The IMF expects lower growth in major emerging markets outside Asia and the further tightening of international financial conditions to impact Asia’s growth prospects. Slower growth in China will also affect growth. Accordingly, Asia is expected to grow at 5.6% in 2015. India is the only bright spot to this horizon whose growth projections have been revised upwards.
- EuroZone: Growth in the Euro Area is expected to rise to 1.5% in 2015 from 0.9% in 2014. The market sentiment appears to increasingly turning positive on Eurozone growth with the Eurozone composite manufacturing index touching a three year high. Lower crude prices, depreciation of Euro and increased bank lending were the the other positives. The major risk now is related to Greece bailout where time is running out.
- US: The US continues to remain positive on its economic outlook and growth in the US is expected to accelerate to 3.1% in 2015 from 2.4% in 2014. US consumer spending, consumer confidence and hiring have seen a solid start with job openings at a 14 year high and improving housing market conditions. US GDP growth has seen some slowdown recently, but consumption remains fairly robust.
- China: Growth in China is projected to slow down to 6.8% in 2015. With this acknowledgement and the start of monetary easing through rates, the markets are expecting the Chinese macro space to witness more measures in the direction of monetary easing to push growth upwards again.
- Oil: Oil prices briefly touched a 6 year intraday low in March, but Saudi strikes in Yemen led to crude prices firming up. A positive outcome on the Iran nuclear deal could act as a long term softener to prices. This would further firm up the Indian growth story.
- Risks: Among the major risks in the global markets are the risks related to oil demand and prices, geopolitical tensions in emerging markets and stagnation and low inflation in advanced economies. The global economic structure continues to be shaped slowly by the long term trends in population, demographics, oil prices, evolving monetary policies and trade equations.