India's economy: Moving towards normalisation

India witnessed three years of heady growth, with average real gross domestic product (GDP) growth of around 8 per cent.

- RADHIKA RAO

Financial markets responded exuberantly to this world-leading performance. Recently, the growth momentum has moderated, which we view as a process of normalization, returning to a more steady rate of expansion.

This phase of strong growth was accompanied by concerning spillovers in some sectors, which macro-prudential measures are now aiming to contain.

We address three aspects here. One, the factors driving this cyclical moderation in growth. Two, the "heady vs steady" argument extends to the consumer credit cycle. Three, whether an extended period of tight monetary policy will lead to a greater growth sacrifice.

Firstly, tight financing conditions and the lagged impact of idiosyncratic factors —such as general elections, a slowdown in construction activity, delays in project outlays, and adverse weather conditions (ranging from heat waves to heavy unseasonal rainfall)—have emerged as cyclical speed bumps. Our proprietary GDP Nowcast model, along with sub-indices for key growth drivers on both the demand and supply sides, provides insights into the direction of the economy.

Industrial activity and net exports (goods and services) have held up, whilst investments (machinery and equipment) and consumption have lagged at the halfway mark of the fiscal year. Factors such as the regulatory action-driven slowdown in unsecured loan growth, and the inflation fight that has pitched consumers against producers have entailed some economic cost. Lastly, clear signs of a pick-up in private sector capex are still absent. Our previous study established that forward-looking growth expectations and corporate profitability typically convince firms to step up capex commitments.