The strongest BRIC is starting to crumble

Modi MerkelMichael Sohn/APIndian prime minister Narendra Modi.

Up until now, India was the bright spot in a relatively dismal 2015 BRIC story, but it looks like things are starting to turn down for the nation of 1.3 billion.

Weak domestic and external demand, depressed industrial production, and stubbornly low inflation have got some analysts worried.

But lets back track. While China, Russia, and Brazil have all run into trouble, India had been well-positioned for growth for a bunch of reasons, namely, the impact of falling oil prices on the net-importing country; low exposure to its flailing neighbour, China; the rockstar central bank governor‘s successful battle against inflation; and pro-business Narendra Modi’s election, which boosted investor confidence and sent stocks climbing last year.

That was all until last month, when retail and wholesale inflation came in much lower than expected. (CPI inflation growth came in at 5.17 per cent year on year, versus expectations of 5.41 per cent, while WPI inflation contracted 2.33 per cent, more than the expected 2.1 per cent.)

Societe Generale’s Kunal Kumar Kundu chalks it up to weak demand, noting that domestic demand has remained subdued for the past four years. More recently, rural wage growth has slowed too.

Plus, in that time, “every spurt in domestic demand has been met by the drawing down of inventories rather than an increase in production,” Kundu wrote.

External demand has slid too.

While Morgan Stanley analysts predict a rise in urban consumption and capital expenditure, due to “government policy efforts to improve business environment and fast-track the decision-making process,” it’s pretty likely that Reserve Bank of India governor Rajan will be cutting rates again soon.

After two surprise rate cuts this earlier year, Rajan left the benchmark rate at 7.5 per cent last week. The central bank meets again on June 2, but knowing Rajan’s affinity for trolling market watchers with off-cycle rate cuts, it could be sooner than that.

The flipside of this argument is that India’s GDP growth is actually looking pretty strong. In its biannual World Economic Outlook released this week, the IMF predicted that India would grow faster than China in 2015 and 2016.

But remember that India just completely changed the way it calculates GDP — confusing everybody, including Rajan — so it’s probably wise to take these numbers with a grain of salt.

In a recent note, Capital Economics’ Shilan Shah wrote that, for now, it’s best to focus on other indicators of economic activity rather than GDP — like those weak inflation numbers.

“While the Indian economy has the potential to match China’s in both its growth rates and in its importance to the global economy, there is a still a long way to go before this is realised,” he wrote.

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