Inflation above 4% since September 2020, IIP lacks consistent growth: India still expects to do better than its peers
By Dr Samantak Das
The pulse of a country’s economic growth can be measured through major economic indicators such as the Consumer Price Index (CPI) commonly referred to as retail inflation, the Industrial Production Index (IPI), the exchange rate and currency movement. These indicators are closely watched by central banks, policymakers, governments and businesses to predict future growth prospects. India’s persistently high inflation has been a cause for concern due to its impact on all sectors of the economy. The IIP trend also indicates that economic activity in the manufacturing sector is not yet on a steady growth trajectory. Moreover, the movement of the Indian rupee against the dollar also puts heavy pressure on various trade and investment flows.
The consumer price index has remained above 4% since September 2020
Source: Central Bureau of Statistics
RBI’s efforts to shield the economy from the effects of the pandemic led to an accommodative monetary policy. Despite an injection of liquidity through various economic programs and a reduction in the policy rate (repo rate) during the pandemic period, inflation fell sharply as demand declined due to restrictions on economic activities. The Central Bank‘s effort to sustainably support the recovery of growth led to maintaining a low interest rate policy (repo rate). This shift in the RBI’s stance was necessary to contain the economic contraction that has been driven by the pandemic and is expected to severely affect the informal sector of the economy. The economic packages announced by the RBI and the Ministry of Finance have helped to mitigate the impact of economic deprivation.
However, the onset of the geopolitical crisis led to a sharp rise in commodity prices globally. High crude prices and supply chain disruption have led to strong and persistent inflationary trends. Central banks in major economies raised interest rates to contain inflation. In India, RBI raised the policy rate by 190 basis points from May 2022 in tranches. This was done to stop retail price inflation, maintain global interest rate parity and ensure currency stability. The increase in the key rate has caused interest rates on loans to rise by 140 to 150 basis points on average.
This increase in the interest rate has not yet had a significant impact on the economy as a whole and on real estate transactions in particular, both in the residential segment and in the office segment. However, bearing in mind RBI’s inflation forecast of 6.7% through March 2023, which is above the upper target range of 6%, we believe there will be another increase in 40 to 50 basis points of the key rate. This could slow the momentum we witnessed during the initial phase of this year. Residential sales are primarily dependent on home loans and the current mortgage rate has risen from less than 7% to 8.5% over the past 6 months.
This additional increase to 9-9.5% is likely to have an impact on the sales growth we have been seeing for the last 9 months of this year. In office and other commercial real estate segments, rental volume is returning to pre-pandemic levels, and we expect this trend to continue through the next 2 quarters, albeit with a downside risk of global headwinds . Decision-making is slowing in terms of expansion, and we are seeing cautious optimism among the corporate sector and investors. Despite rising interest rates, performance has been resilient, which can be attributed to the limited supply of commercial Class A inventory in desirable business districts. Inflation as a leading indicator has been a global concern, but the progress of the national economy can be better understood by looking at the Industrial Production Index, which tracks the volume growth of manufacturing in the economy. . The IIP covers broad sectors such as mining, manufacturing and power and other industry groups such as basic goods, capital goods and intermediate goods.
IIP lacks consistent growth trend
Source: Central Bureau of Statistics
IIP tracks the growth of manufacturing activity in different sectors of an economy. IIP flash estimates for August 2022 point to a contraction of (-) 0.8% – an uneven recovery trend. It should be noted that although the service sector accounts for the largest share of GDP (more than 50%), the multiple linkages of the manufacturing sector and its impact on employment growth are important. The long-term trend of PII growth during and after the pandemic indicates that the recovery cycle has been affected due to disruption in the input supply chain as well as rising costs due to geopolitical crises. Various policy initiatives aimed at making India a manufacturing hub have been successful in attracting investment. However, such measures will take time to reflect in growth.
Although the current situation indicates many challenges to economic growth with some global factors beyond forecast and control, the resilience of the national economy, the relatively better performance of the currency and the proactive policy measures indicate that the India’s GDP is expected to show growth of 6.5-7%. in fiscal year 2022-23 – highest among top 5 economies.
The Indian currency has depreciated by around 10% over the past 9 months against the US dollar. However, it has shown more resilience against most other currencies in the recent past.
This definitely puts India in a competitive position for global outsourcing business including global exports and hence the short term impact will not be significant. Although imports may be affected, the gain in exports should offset the negative impact. The private final consumption cycle, which was extremely sluggish, has recently revived and is expected to accelerate. The anticipation of a gradual slowdown in inflation in the April to June quarter of 2023 and a possible de-escalation of the geopolitical crisis will reduce the obstacles to economic growth over the next year. Although the specter of recession seems imminent globally, cost optimization efforts, emergence as an alternative manufacturing hub and strategic alliances would ensure that the Indian economy should fare better than peers.
(Dr. Samantak Das is Chief Economist and Head of Research and REIS at JLL, India. The opinions expressed are those of the author and do not reflect the official position or policy of FinancialExpress.com.)