By Craig Botham
India’s fourth quarter GDP growth slowed slightly but still beat estimates, at 7.3% year on year. While the number confirms India’s place as the fastest growing major economy, we have some reservations.
Digging down into the data shows the final quarter’s performance was driven by consumption and government spending, while investment weakened.
Imports contracting even more rapidly than exports meant net exports contributed positively to growth.
Given the overwhelming need for investment in India, this is a disappointing result despite the stronger-than-expected GDP number.
That growth is increasingly reliant on current spending also suggests to us that this is not a particularly sustainable formula, especially in light of the announced fiscal consolidation path, and the fading boost from cheaper energy.
An expansion in credit provision can help for a time but this does not create secure longer-term foundations in the absence of investment in productive capacity.
We also have concerns over the accuracy of the data, which are at odds with other indicators.
Industrial production, for example, likely grew around 5% year on year in the fourth quarter of 2015 while national accounts data indicate a 12.6% year on year increase in manufacturing in the same period.
Based on a composite of higher frequency data we believe growth in GDP to be closer to 5-6% than the 7.3% reported.
While a consumption-led story may have some legs left given the willingness of private sector banks to lend, India’s longer-term growth aspirations remain dependent on economic reform that prompts productive investment.
We are still waiting, and our eyes now fall on the February budget.
Craig Botham is an emerging markets economist at Schroders
