Weakening Inflation and Soft Sentiment Does Not Bode Well for Indian Growth

Inflation
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The combination of weakening sentiment and softer inflation could become an issue for India and its central bank. Indian policy makers have long tried to reduce inflation expectations, but now they are in the same boat as most of the world, trying to increase asset prices. Unfortunately, there is a dark side to the success of reducing inflation expectations. During the past decade, India had double digit inflation but now it has declined to approximately 3%. In addition, Indian imports have declined which is a sign of falling consumption.

Most of the decline in inflation expectations has been due to a slump in food prices. Now businesses are starting to worry that the data is signaling a worsening in the economy’s growth outlook. Unfortunately, low inflation is now always a good thing. Moderate inflation means that consumption is elevated which buoys investment. When inflation is low, consumption can stagnate without the proper monetary accommodation. 

Indian wholesale inflation which measures intermediate goods has dipped to a 2-year low. Core wholesale inflation which strips out volatile food and fuel prices, slowed to a 24-month low in June down to 4.1%. 

Business Sentiment is Also Declining

Lower than expected inflation expectation is not the only issue facing policy makers. Indian business sentiment is also slipping. Business sentiment in India fell to its lowest level since June 2016, due to concerns over a contracting economy, government policies and water shortage, according to a survey conducted by IHS. The market data research company in its business outlook predicts softer economic activity which will be underpinned by the downward revisions of profit outlook, subdued hiring plans and relatively muted capital expenditure. 

Growth Forecasts Reduced

The companies that were involved in the survey said that they see the output growth in the year ahead falling from 18% in February to 15%.  The survey also showed that water shortages, public policies and weak sales have restricted sentiment. Companies are also concerned about potential rupee depreciation pushing prices for imported materials upwards, tax hikes, financial difficulties and customers increasingly demanding discounts. 

Imports Decline

India’s imports declined to their lowest level in four months in June to $40.29 billion, down 9% from a year ago, which indicates softening consumption. The Indian economy grew at 5.8% in the Q1 which was a five-year low, hurt by weak consumption. The latest data added to fears that the economy may have slowed further in the Q2. India’s oil imports during June fell 13.33% to $11.03 billion, partly due to low oil prices. Imports excluding gold and oil also fell 9% to $26.57 billion in June 2019, the data showed. India’s merchandise exports also fell in June by 9.71% year over year to $25.01 billion, narrowing the trade deficit for the month by 8% to $15.28 billion. The decline was likely a function of the trade dispute India is having with the US.

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