1 September 2015

The Impact of India's Surprising Economic Slowdown

Amid all of the poor economic results coming out of the world’s leading emerging markets in recent months, India had emerged as the one large emerging market that appeared to be enjoying a spell of accelerating growth, leading to India regaining its position as one of the leading hopes for boosting growth for the global economy.  However, an unexpected slowdown for the Indian economy in the second quarter of this year, coupled with continued uncertainty over the accuracy of India’s new economic growth calculations, has dampened the enthusiasm for India’s economic outlook in the coming months.  With emerging markets in turmoil around the world, this latest news from India will do little to boost business or investor confidence, adding to the downwards pressures facing the Indian and the global economies.

After growing by 7.5% year-on-year in the first quarter of this year, India’s economic growth rate slowed to 7.0% year-on-year in the second quarter, surprisingly most economists who had expected growth to remain near their previous levels.  This slowdown was attributed to a slump in India’s manufacturing sector, which has been impacted by weaker demand in China and many of India’s other leading export markets.  Furthermore, domestic demand growth has not accelerated as fast as had been hoped for, given the vast potential for growth in India’s domestic consumer market that is being bolstered by the country’s rapidly growing consuming-age population.  Overall, this 7.0% GDP growth rate in the second quarter matches that of China, resulting in the world’s two most-populous countries remaining the world’s two fastest-growing large economies, despite their recent slumps.  However, more was expected of both countries in 2015.

Another aspect that India shares with China is the fact that an increasing number of economists are questioning the accuracy of their economic growth data.  In China, most economists believe that the 7.0% GDP growth rate recorded in the first half of this year is overstated and that growth was actually closer to 5%.  In India, last year’s change to the country’s economic growth calculation continues to sow confusion as it has yet to be accurately explained how India’s growth rates for the past two years could have been increased so dramatically as a result of this new formula.  According to the new growth calculation, India’s economy has grown by an average of 7.1% over the past eight quarters, well above the levels achieved under the previous growth formula.  As in China, other economic data such as manufacturing output, export revenues and electricity usage seem to suggest that the Indian economy has not grown as fast as these GDP figures would indicate.  As a result, businesses and investors have been left with much uncertainty over the actual health of the Indian economy in recent months, something that has already had a major impact on Chinese share prices in recent weeks.

This uncertainty in India and China is adding to the already considerable headwinds facing most of the world’s leading emerging markets.  While growth has slowed in these two countries, it remains at a very respectable level, particularly when compared with the economic results seen in other large emerging markets.  For example, the other three BRICS countries (Brazil, Russia and South Africa) have all seen major downturns in recent months, with Brazil and Russia in the midst of deep recessions.  Moreover, those emerging markets dependent upon natural resource exports to China, India and other large emerging markets have been devastated by the sharp fall in natural resource prices in recent months.  Therefore, this new uncertainty in India is just the latest in a series of developments that are likely to prevent global economic growth from rising to pre-crisis levels at any point in the near-future.