Economic Outlook for India 2016

After back-to-back years of rapid expansion, India’s economy is expected to gather pace this year, according to a new forecast by the country’s statistics office in New Delhi.

The Indian government projects national growth will accelerate to 7.6% in fiscal year 2016, up from 7.2% the previous year. The accelerated pace of expansion is largely attributed to an upward revision in first quarter growth.

“The direction of the numbers is very positive,” said Economic Affairs Secretary Shaktikanta Das.
The policy and reform measures the government has undertaken in the past one-and-a-half years are beginning to show results.”[1]

India’s fiscal year ends on March 31, 2016.

The government’s fiscal year projections are a good indication of where the economy is headed in the remainder of the year. According to the International Monetary Fund (IMF), India will outpace all other emerging and developing markets in growth for the next two years.

Robust Full-Year Growth Expected

The IMF projects India’s economy will grow 7.5% in all of 2016, up from 7.3% in each of the previous two years and more than double the global growth average. By comparison, emerging market and developing economies as a whole are projected to grow just 4.3%, down from a prior estimate of 4.5%.[2]

A weakening Chinese economy is largely to blame for the downward revision in emerging markets. China’s gross domestic product (GDP) expanded 6.9% in all of 2015, the slowest rate of expansion in 25 years.[3] China’s economy is expected to slow in each of the next three years,[4] which could spell trouble for India.

Weak Global Demand Could Present Challenges

Despite being described as the world’s fastest growing economy,[5] India’s struggling export sector will face strong headwinds this year, thanks to a mediocre global market. In annualized terms, India’s exports fell nearly 15% in December, marking the thirteenth consecutive monthly drop. Declining orders from the United States and Europe, combined with a weaker Chinese yuan, are largely to blame.

Looking at the global economic picture, these forces are unlikely to change anytime soon. While US GDP is forecast to grow 2.6% this year, the economy lost a lot of momentum in the fourth quarter, expanding just 0.7% annually and 2.4% in all of 2015.[6]

Meanwhile, Eurozone GDP expanded just 1.5% in all of 2015. Growth was a mediocre 0.3% in the fourth quarter, with Greece slipping back into recession.[7]

China-Related Volatility

China’s yuan devaluation last August created sharp demand for the US dollar, as investors locked into the safety of the greenback amid fears of another devaluation. As a result, India’s rupee plunged to two-year lows against the dollar. The rupee-to-dollar exchange rate would remain low for the remainder of 2015.[8] While a weaker rupee would normally aid domestic manufacturers, this hasn’t occurred because China’s yuan has fallen faster. Given that both countries are competitors in a number of key export industries, including textiles, apparels and chemicals, a weak Chinese yuan means lower profitability for Indian companies.[9]

Given that China is a top-five destination for Indian products, investors should closely monitor the consequences of slowing Chinese demand on its neighbour to the west.

Rate Cut Unlikely in FY 2017

After cutting interest rates aggressively throughout 2015, the Reserve Bank of India may need to tighten monetary policy this year to contain rising inflation. Retail inflation spiked to a 17-month high in January, underscoring the country’s imbalances.[10] Consumer inflation has also accelerated faster in each of the past six months, reaching 5.7% in January.[11]

RBI Governor Raghuram Rajan told a gathering of bank leaders earlier in February that the country’s financial system “may require deep surgery” and not “band aids” to fix their balance sheets.[12]

“Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned,” Rajan said in Mumbai on February 12. “But to do deep surgery such as restructuring or writing down loans, the bank has to recognize it has a problem – classify the asset as a non-performing asset.”[13]

Analysts are quick to remind us that the Bank implemented high interest rates shortly after the global financial crisis when inflation was averaging close to 10% year-on-year. The RBI lowered rates as recently as March 2015 as a way to endorse its mandate.[14]

Stocks Enter Bear Market

Indian stocks plunged into bear market territory earlier this month, joining a host of global markets to fall at least 20% from their recent highs. As a matter of fact, Indian stocks were down 23% from their January 2015 highs, shedding $365 billion in market value over that period.[15]

India’s Sensex Index is down a staggering 12% in 2016 and 20% year-over-year. The S&P BSE 500 index, a broader representation of the Indian stock market, has declined more than 13% since the start of the year. By February 12, 424 of the 500 stocks listed on the BSE 500 were trading below the 200-day moving average.[16]

The outlook on Indian stocks has turned volatile this year, despite previously bullish estimates from equity analysts who were expecting a rebound in share prices sooner rather than later.[17] Prior to global market rout in January, market experts had forecast a 20% surge in the Sensex over the next 12 months.[18] While this is still possible, it is highly unlikely given how fast the benchmark gauge has fallen.

Looking ahead, market analysts say the next major trigger for Indian stock markets could be the Railway and Union Budget 2016-2017, which will be announced later in February. A broader look at the market suggests that a recovery isn’t possible without a semblance of stability first.

“For any sustainable recovery, markets need to stabilise first but that seems difficult, considering the pace of decline in the passing week,” according to Vijay Singhania, Founder of Trade Smart Online.[19]


As the world’s seventh largest economy, India faces plenty of upside and is clearly the frontrunner in terms of economic growth. However, excessive inflation, waning international demand and volatile equity markets are cause for concern. The volatile nature of the global financial markets since the collapse of oil prices is likely to keep market activity turbulent for the foreseeable future. India’s strength continues to be in domestic demand, which is projected to remain strong for the foreseeable future.[20] Rising consumption is expected to offset waning international demand, at least in the short term.

Looking long-term, India will serve as an important catalyst for the global economy. As China’s prolonged period of runaway growth continues to fade, many are hopeful that India is Asia’s next rising star. Currently, India is the world’s seventh largest economy at nearly $2.2 trillion. By 2020, India’s GDP is forecasted to grow to more than $3.4 trillion, overtaking France as the world’s sixth largest economy.[21] India is projected to have by far the fastest growth rate during that period at around 7.3%.

[1] ET Bureau (February 9, 2016). “India’s GDP projected to grow at 7.6% in FY 16.” Economic Times.

[2] International Monetary Fund (January 2016). Subdued Demand, Diminished Prospects. World Economic Outlook.

[3] Mark Magnier (January 19, 2016). “China’s Economic Growth in 2015 Is Slowest in 25 Years.” The Wall Street Journal.

[4] Ansuya Harjani (August 31, 2015). “Goldman takes a knife +P forecasts.” CNBC.

[5] Tim Worstall (February 6, 2016). “India To Be World’s Fastest Growing Economy: Keeping It Going Will Be The Difficult Trick.” Forbes.

[6] Jeffry Bartash (January 29, 2016). “U.S. GDP fizzles in the fourth quarter.” Market Watch.

[7] Euro News (February 12, 2016). “Eurozone GDP growth still weak, Greece in recession again.” Euro News.

[8] H.S. Borji (December 21, 2015). “Chinese Yuan Devaluation Can Impact India.” Investopedia.

[9] H.S. Borji (December 21, 2015). “Chinese Yuan Devaluation Can Impact India.” Investopedia.

[10] Reuters (February 12, 2016). “Retail inflation hits 17-month high, industrial output falls again.” The Times of India.

[11] Arab Times Online (February 12, 2016). “India Inflation Notches Up to 5.7% in Jan – RBI Chief Says Lenders Need ‘Deep Surgery.’ Arab Times Online.

[12] ENS Economic Bureau (February 12, 2016). “Band-aid won’t do, banks need deep surgery, says RBI Governor Raghuram Rajan.” Indian Express.

[13] Arab Times Online (February 12, 2016). “India Inflation Notches Up to 5.7% in Jan – RBI Chief Says Lenders Need ‘Deep Surgery.’ Arab Times Online.

[14] Radhika Rao (February 3, 2016). “RBI monetary policy: Aggressive rate cuts not likely in FY17.” Live Mint.

[15] Ashutosh R. Shyam (February 12, 2016). “Indian stocks drop by 23%, join bear market bandwagon.” Economic Times.

[16] Ashutosh R. Shyam (February 12, 2016). “Indian stocks drop by 23%, join bear market bandwagon.” Economic Times.

[17] Kailash Bathija (June 29, 2015). “Forecasts for BSE Sensex trimmed, but rise seen into 2016 – Reuters poll.” Reuters.

[18] Rahul Obero (December 28, 2015). “Sensex may surge over 20% in 2016, top 10 investment options for you.” The Financial Express.

[19] PTI (February 14, 2016). “Outlook: Macro data to dictate trend: stocks to see volatility.” The Financial Express.

[20] Corinne Abrams (October 7, 2015). “What the IMF Said About India’s Growth Outlook.” The Wall Street Journal.

[21] Statistics Times (February 7, 2016). “Projected GDP Ranking (2015-2020).

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