Emerging

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EcoEmerging// 1st quarter 2019  
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economic-research.bnpparibas.com  
India  
Mixed performance for the end of Narendra Modi’s mandate  
India’s economic growth slowed between July and September 2018, hard hit by the increase in the oil bill. The sharp decline in oil  
prices since October will ease pressures, at least temporarily, on public finances and the balance of payments, and in turn on the  
Indian rupee (INR), which depreciated by 9% against the dollar in 2018. In a less favourable economic environment, Narendra Modi’s  
BJP party lost its hold on three states during recent legislative elections.  
Growth slows but prospects remain upbeat  
1-Forecasts  
In fiscal Q2 2018/19 (July-September 2018), India’s GDP growth  
slowed to 7.2% year-on-year (y/y). The slowdown is mainly due to  
the negative contribution of net exports to growth, which was  
induced by a sharp rise in imports (oil and capital goods). Domestic  
demand was still dynamic even though it slowed slightly from the  
previous quarter. Household consumption was lifted by the easing  
of inflationary pressures (even though the decline in agricultural  
prices strained household revenues in rural areas). Investment  
growth remained buoyant for the third consecutive quarter (+12.5%  
y/y) due to the increase in government spending on infrastructure,  
an upturn in bank lending and the increase in production capacity  
utilisation rates in the manufacturing sector.  
2017 2018e 2019e 2020e  
(
1)  
Real GDP growth (%)  
6.7  
7.4  
7.6  
7.8  
(1)  
Inflation (CPI, year average, %)  
3.6  
3.8  
4.0  
4.1  
(1)  
Central Gov. Balance / GDP (%)  
-3.5  
-3.5  
-3.3  
-3.0  
(1)  
Central Gov. Debt / GDP (%)  
46.9  
-1.9  
46.1  
-2.7  
45.7  
-2.5  
45.2  
-0.8  
(
1)  
Current account balance / GDP (%)  
(
1)  
External debt / GDP (%)  
20.4  
409  
19.4  
393  
19.2  
410  
19.1  
418  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDINR (year end)  
11.5  
63.9  
9.1  
9.3  
9.5  
69.8  
72.0  
73.5  
(1): Fiscal year from April 1st of year n to March 31st of year n+1  
Against all expectations, the sharp rise in fuel prices was more than  
offset by the decline in food prices (-2.6% y/y in November), which  
still account for a very big share of the total consumption basket of  
Indian households (39%). Consequently, the increase in the general  
price index was limited to 2.3% y/y at the end of November, which is  
much lower than the target set by the monetary authorities (4% +/- 2  
percentage points).  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Economic slowdown in Q2-FY19  
GDP (y/y) Household consumption (pp) Public expenditure (pp)  
 Investment (pp)  Change in inventory (pp)  
 Net exports (pp)  Statistical errors (pp)  
1
5
0
5
0
5
Despite the upturn in lending (+13% y/y), India’s central bank  
decided to maintain its key rates at 6.5% at the December monetary  
policy committee meeting at a time of less volatility for the rupee  
1
(
INR). Even so, interest rates on new loan production increased  
slightly in the third quarter (+20bp), reflecting the tightening of  
monetary policy in June and August.  
Growth prospects are still looking upbeat. For full-year 2018/19,  
growth is expected to near 7.4% before gradually accelerating over  
the next two years, despite the slowdown in foreign demand. Robust  
domestic demand will drive growth. The banking sector clean-up will  
favour a rebound in private investment in industry, even though  
interest rates are expected to continue rising slightly.  
-
-10  
2013  
2014  
2015  
2016  
2017  
2018  
Source: CEIC  
The government did not want to exceed 75% of its target during this  
period to avoid having to revise downwards the expenditures  
planned for the second half of the fiscal year. During the same  
period last year, the deficit amounted to 96% of its full-year target.  
The budget overrun is mainly due to revenues, which fell short of  
targets. Although fiscal revenues were up 8.2% compared to the  
previous year, they accounted for only 45.7% of the target in the first  
7 months of this year, compared to 48.1% last year and an average  
of 50% over the past three years. Although VAT revenues increased  
Central government budget overruns in the first 7  
months of the fiscal year  
After five years of fiscal consolidation, the central government  
should not meet its deficit reduction target for the second  
consecutive year (from 3.5% of GDP in 2017/2018 to 3.3% of GDP  
in 2018/2019). Fiscal revenues, and VAT revenues in particular, will  
fall far short of the government’s targets.  
In the first 7 months of fiscal year 2018/2019, which will end on 31  
March 2019, the fiscal deficit reached 104% of the annual target.  
EcoEmerging// 1st quarter 2019  
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economic-research.bnpparibas.com  
significantly, they were still far below the finance ministry’s forecast  
3
- Appreciation of the rupee (INR) and the decline in oil prices  
Exchange rate INR/USD, 2017=100 (down = depreciation, LHS)  
▪▪ Oil price, 2017=100 (inversed, RHS)  
(
35% of the full-year target).  
In the first 7 months of the fiscal year, public spending was relatively  
in line with fiscal targets: it amounted to only 59.6% of full-year  
spending, slightly less than the previous year despite the increase in  
the cost of gasoline price subsidies (+7.2%). One positive point is  
that investment spending, which is vital for supporting medium-term  
growth, increased by nearly 9% compared to the same period last  
year and amounted to 58.9% of the full-year target.  
1
10  
00  
90  
80  
9
1
1
0
00  
10  
1
120  
Even so, it will be hard for the government to meet its 0.2 point  
deficit reduction target without significantly cutting back investment  
spending in the second part of the fiscal year. The decline in oil  
prices since mid-October should nonetheless help reduce gasoline  
130  
140  
150  
1
160  
subsidies and the shortfall in import taxes .  
Q2-2018  
Q3-2018  
Q4-2018  
Q1-2018  
Q1-2019  
Contrary to the central government, the states managed to limit their  
fiscal deficit in the first half of the current fiscal year, which  
accounted for 35% of the full-year target of 2.6% of GDP (vs. 3.1%  
Source: CEIC  
Although the provisioning rate is still far too low, it rose to 52.4% in  
September, up from 48.1% in March 2018. At the same time,  
solvency ratios deteriorated slightly. In order for the most fragile  
banks to meet the target ratio of 9% at 31 March 2019, the  
government announced that it would inject an additional INR 410 bn  
by the end of the fiscal year. Given their financial difficulties, the  
state-owned banks only managed to raise INR 240 bn of the needed  
INR 580 bn. Government support will amount to INR 1060 bn in  
fiscal year 2018/19. The central bank also announced that it would  
postpone by one year the 0.625% increase in the Capital  
Conservation Buffer to 2.5%.  
2
of GDP in 2017/18) . This strong performance, like the one last year,  
mainly reflects the increase in revenues induced by central  
government transfers to offset the loss of revenues following the  
introduction of VAT. Unlike the central government, however, the  
states will concentrate most of their spending in the fiscal second  
half. Moreover, following changes of government after the 11  
December elections, three states (Madhya Pradesh, Rajasthan and  
Chhattisgarh) announced additional spending measures. The new  
governors (members of the Congress Party) decided to cancel  
certain loans taken out by farmers (as was already the case in  
seven other states) and to increase the minimum selling prices of  
certain crops in addition to those announced by the Modi  
government last summer. For some states, such as Madhya  
Pradesh, the cost of loan cancellation can account for as much as  
20% of their budget, and will thus have to be spread out over  
several years. Although there is only limited risk of budget overruns  
by the states, debt cancellations, like those benefiting public  
electrical utilities, are not favourable for implementing good  
governance and management of the country’s credit risks.  
Despite the risk of budget overruns, in October the IMF forecast a  
decline in the public debt to GDP ratio. Over the past five years, this  
ratio has risen by more than two percentage points according to the  
central bank, and remains much higher than the ratio for the other  
Asian countries (68.9% of GDP in March 2018 according to the  
central bank). A simple levelling off seems more probable.  
State-owned banks: the situation stabilises  
The situation of banks has stopped deteriorating but remains very  
fragile. In Q2 2018/2019, the doubtful loan ratio declined for the first  
time since mid-2014 to 10.8% (14.8% for state-owned banks).  
1
To limit the impact of higher oil prices on purchasing power, in October the  
government lowered its import taxes on petroleum-based products and asked  
local governments to reduce the VAT rate on these products. Moody’s estimates  
that the fiscal cost will be small (0.05% of GDP by the end of the current fiscal  
year).  
2
Monthly Bulletin of the Reserve Bank of India, December 2018  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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