LONDON, Dec. 4, 2019 /PRNewswire/ -- With Q3 GDP data coming in at 4.5% today, concerns are rising about prospects for India. We are not worried. Our narrative is for growth in 2019 to be the low point, explained by ongoing troubles in the financial sector, temporary uncertainty emanating from this year's election and changes to auto market standards. We expect India to return to the growth fast lane, averaging ~7% over the next five years. Our forecast is based on assumptions that the government will act boldly to set the direction of future policy, and those policies to encourage consumers and companies to spend more. However, risks to growth lie to the downside, where the current weakness may drag its feet into 2020.
This insight sets out CRU's narrative on India. It explains three things (i) the weak 2019 growth (ii) the expected recovery in 2020 and (iii) the risks to that expected recovery.
Indian growth hits a speed bump in 2019
In the words of Abhijit Banerjee, the 2019 Nobel Prize in Economics, "I do not know why India is growing, I know the reasons why it shouldn't grow" (Watson Institute, Oct 16 2019). GDP growth for Q3 released today marks the sixth consecutive quarter of declining growth, at 4.5%. This was slightly lower than the 5% expected by us and other leading forecasters. Despite this downside surprise, CRU expects growth in India to average just under 5.5% y/y in 2019, rising to average 7.0% over the next 5 years.
Our view is that the weak growth in 2019, is a speed bump, due to systemic fragility in the financial sector and temporary uncertainty resulting from this year's election and reforms in the auto market. We expect a recovery of growth in 2020, as policies take time to be effective.
A weak 2019 explained by structural and temporary factors
2019 has been an unequivocally weak for growth. This year, the Indian economy is facing a collapse of investment and the weakest consumption in 14 years in terms of contribution to GDP growth. Exports are not growing. Overall the situation is concerning and this is notable in commodity end use sectors: the automotive industry is facing the worst slowdown in two decades with total automotive production dropping to -24.4% y/y in October. Latest data also show a contraction in factory output, reaching -4.3% y/y for Industrial Production and a negative growth for each of its three components (manufacturing, mining and utilities). Construction is also slowing.
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