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India Ratings (Ind-Ra), a Fitch group company, on Monday, said economic slowdown in China is a matter of bigger concern than the Greece crisis for India.
In its latest report — Road Ahead Turning Favourable — it maintained projections for the country’s economic growth at 7.7 per cent for 2015-16. Though lower than the official target of 8.1-8.5 per cent, these are in line with other agencies. However, the projection has a downside risk in the sense that a sub-par monsoon could shave off 23 basis points (bps), which would make economic expansion only moderately higher than 7.3 per cent in 2014-15.
The Fitch group company said there is room for the Reserve Bank of India (RBI) to ease its monetary stance, given the inflation scenario. Consumer price inflation rose 5.40 per cent in June, compared to 5.01 per cent in May. It cautioned against any complacency on the basis of India overtaking China in terms of economic growth from 2015-16 and said the economy would face overheating if the growth reached around eight per cent with infrastructure bottlenecks.
“Ind-Ra believes recent economic developments in China are bigger issues, concerns for the Indian economy than the Greece issue. An economic slowdown in China will have larger implications for global and Indian economies,” the analyst and research firm said.
It said the magnitude of the Greece issue was negligible and India’s direct trade links with that country was limited.
However, it also said Greece could have a significant impact on global demand and India’s economy if the high credit risk becomes contagious to other countries in the Euro zone. European leaders brokered a deal with Greece to bail it out, subject to conditions.
The report said China, being the second largest economy in the world, an economic slowdown in the country will have larger implications for global and Indian economies.
It said adverse economic developments in China might have a directionally negative impact on the Indian metals industry, as well as on sectors with an export focus.
India’s exports to China declined 19.6 per cent year-on-year in 2014-15 and its share in the former's trade stood at 3.86 per cent.
While exports to China are not significant, those to Asian countries account for nearly half (49.57 per cent in FY15) of India’s exports. As such, a sustained slowdown of the Chinese economy would dampen economic activity of other Asian countries, as trade linkages of Asian countries with China are fairly high.
Indian exports to Asian countries have been sluggish over the last three years, witnessing contraction in FY15, a growth of just 1.8 per cent in the previous year and against fall in FY13. Exports to Asian countries declined by 17 per cent in the first five months of the current financial year compared to the corresponding period of the previous year.
Ind-Ra, however, sees a window of opportunity for India from petering economic growth in China.
“Although Indian exports could be affected due to slower global growth, lower commodity prices can provide some support,” said Ind-Ra Chief Economist Devendra Pant.
Besides, any turmoil in the Chinese market would have repercussions for Indian markets and the rupee. India Ratings said emerging market exchange traded funds (ETFs) may face redemption pressure. This could translate into such funds selling Indian stocks which form part of the ETF basket. If these stock sells are not lapped up by foreign investors through India dedicated funds, there may be some depreciation pressure on the Indian currency.
Since China's economic growth is expected to be seven% in 2015, India is likely to over take it, even if subdued projections by IMF and the World Bank at 7.5% for 2015-16 is taken into account.
Ind-Ra projections are still far higher, though it retained its earlier projections at 7.7% for 2015-16. However, it cautioned against any complaceny in this regard.
"While Indian economic growth will overtake China’s in 2015, continuous policy intervention is key to sustain this growth," it said.
It said without addressing infrastructural issues, sustaining growth around 8% and more will not be possible as the economy may witness overheating.
At the current juncture, it said policy intervention and public spending are critical to address infrastructural issues because of the stretched and over leveraged balance sheets of the corporate sector and higher non-performing advances of the banking sector to fund corporates for this.
Most of the recent policy initiatives taken by the government are aimed at addressing these structural issues. If the current policy initiatives and efforts of the government are sustained, Ind-Ra believed the Indian economy will gradually return to a higher growth trajectory over two-to-three year period.
Indian agriculture’s resilience to monsoon failure has increased over time; however, it is not fully insulated from the vagaries of rainfall, said the report.
Ind-Ra estimates showed that the proportion of non-agriculture in rural net value added to have increased to 70% in FY13, allaying fears of a sharp demand slowdown in the event of sub-par monsoon.
In case monsoon performance is in line with India Meteorological Department forecast, Ind-Ra expected GDP growth to decline by 23 basis point compared with projections of 7.7%.
It said with growth-inflation dynamics improving and inflation likely to remain in the Reserve Bank of India’s (RBI) comfort zone, there is still some room for RBI to do further monetary easing.
"This is however subject to food management by the government to control the inflation arising out of sub-par monsoon (if it happens). In such a situation, Ind-Ra believes RBI will go for another 25 bp cut in policy rates in FY16," the report said.
Ind-Ra expects the current account deficit to remain comfortable in FY16 (1.3% of GDP) and does not pose any challenge to the macro-economic stability of the economy.
Ind-Ra does not rule out intermittent volatility in the currency market and expects RBI to intervene in the forex market to counter unusual volatility. The rupee might trade in the band of 61-64 against a dollar during FY16 and settle at around 63 against 61.1 in FY15.
