Thoughts

January 06, 2023 | 13:30

India Pulse Check

Economist

Senior Economist and Vice President
Economics

Sarah Howcroft conducts risk analysis across a range of countries and industries in which BMO has strategic inte... (Read more)

Sarah Howcroft , CFA

Senior Economist and Vice President
Economics

Sarah Howcroft conducts risk analysis across a range of countries and industries in which BMO has strategic inte... (Read more)

It’s been reported that India is on the cusp of overtaking China as the most populous country; in fact, this may already be the case. What’s less appreciated is India’s rapid ascent in the GDP charts, having likely unseated the UK as the world’s fifth-largest economy in US dollar terms in 2022, up from the tenth spot less than a decade ago, and still climbing. Given its rising importance in the global economy, it’s worth reviewing India’s prospects when much of the rest of the world is facing recession risks.

India is experiencing the same headwinds as its peers—heightened inflation, rising interest rates and geopolitical uncertainty. However, the economy appears to be holding up relatively well as real GDP grew 6.3% y/y in Q3/22 following a 13.5% spike in the prior quarter. Tellingly, both the manufacturing and services PMIs have risen over the last three months and are among the highest of all countries tracked. A few factors that will help insulate the economy from external pressures:

India is less reliant on trade than other major economies, with exports accounting for around 20% of GDP (vs. an OECD average of 28%). And, while external demand has begun to soften (October saw the first y/y drop in goods exports in 20 months), domestic consumption and investment remain firm. Moreover, surging international remittances are providing an important offset to a wider trade deficit, likely topping a record US$100 bln in 2022 (~3% of GDP).
The inflation shock has been less pronounced than elsewhere, with headline CPI easing to 5.9% y/y in November (just inside the 2%-6% target range) from an eight-year high of 7.8% in April. The central bank has thus been afforded a more moderate pace of rate hikes, raising the key policy rate by 225 bps to 6.25%. Still, core inflation is sticky and food prices—which make up nearly half of the CPI basket—are notoriously volatile and prone to weather-driven swings. A possible bumper harvest (mostly wheat) in the spring after 2022’s heatwave-curbed output could help ease domestic price pressure.
Perhaps most crucially, India’s corporate and bank balance sheets have vastly improved since the eruption of the shadow banking crisis in 2018. The banking sector’s non-performing loans have been reduced to below 6% of gross loans from over 10% in 2018. In turn, bank lending has revived, with non-food credit surging 16.4% y/y in November (vs. +7.1% a year ago). Still, continued problem loan repair will be key to strengthening investment over the medium term.

Bottom Line: India appears well-positioned to weather renewed global turbulence and its status as one of the fastest-growing economies should be preserved. We forecast real GDP growth to come in around 6.8% in the 2022/23 fiscal year (ending March 2023) and 6.0% in 23/24.