Indian Economy Gaining Momentum
Economic news out of India this week was broadly better than expected. That reinforced our view that with some of the structural reforms already implemented, India’s economy should be a top performer over the next few years. After implementing some measures that slowed the pace of GDP growth in recent years, India’s economy remains on track as one of the fastest-growing economies in the world. Economic indicators out of India have generally been better than expected in recent weeks and months, and that theme remained more or less intact this week as well.
The second half of 2017 was marked by a rising rate of inflation in India, which stoked concerns that the Reserve Bank of India (RBI) might eventually need to raise its repo rate (Figure 1). Since the start of the current year, some of that pressure has eased as inflation has come off the boil. In January, the year-over-year rate of CPI inflation slowed for the first time in six months coming in at just over 5 percent, and we learned this week that in February it slowed further to just 4.4 percent (Figure 2). That was even more of a slowing than the 4.7 percent rate that had been expected and it takes some pressure off the RBI to raise rates at the upcoming April meeting.
We also learned this week that year-over-year growth rate of industrial production in India quickened to 7.5 percent in January, which was more than the 6.4 percent that had been expected (Figure 3). All major categories were positive when compared to where they were a year ago.
The improvement in industrial production is consistent with our real GDP forecast for the Indian economy of 6.7 percent in 2018 before picking up to 7.4 percent in 2019. In each of the next two years, the numbers we have for India’s economy are the fastest of any of the economies we cover, but it is not without its challenges.
To be sure, there are some pretty substantial hurdles that have already been cleared. The “demonetization” or removal of larger denomination currencies late in 2016 led to some retrenchment in consumer spending that weighed down growth in the first half of 2017.
Author
Wells Fargo Research Team
Wells Fargo
