Recent developments suggested that India’s economy was in good shape with a positive outlook. Real GDP grew by an unusually strong 7.5 percent year on year, exceeding the previous quarter’s 6.6 percent. The Reserve Bank of India cut interest rates by 25 basis points to 7.25 percent. Although India had long suffered high inflation, recent data showed a sharp moderation in price growth.
In a report, Asia Investment economist Camille Accad said India’s GDP growth ranked among the world’s fastest, placing it among the top ten economies and ahead of China in growth. Other data, however, were misleading. India changed its GDP calculation method in January, lifting 2013–2014 growth from 4.7 to 6.9 percent and adding 1.9 percentage points to growth in 2012–2013.
He said these figures did not match trends in industrial output, spending, imports, credit, or car sales and had attracted criticism, including from Reserve Bank governor Raghuram Rajan. Statistical discrepancies also added 1.8 percentage points to first-quarter GDP growth.
Accad noted inconsistencies between wholesale and retail price data: wholesale prices were contracting while consumer prices continued to rise at a steady pace. Lower energy prices were the main reason for the decline in wholesale prices, but energy prices had not been reduced for consumers. Food was the principal factor distinguishing the wholesale and consumer price indices.
In both cases, food prices continued to rise faster than other goods, pointing to unresolved structural challenges. India lacked adequate infrastructure such as roads and product storage facilities, creating supply shortages in food markets and upward pressure on prices.
Accad said several factors would contribute to higher inflation in the coming months. Energy inflation was expected to rise after recent gains in global oil prices. Energy prices looked much higher in the second half of the current year compared with the previous year, which would increase annual inflation.
Food prices would also face upward pressure over the same period, as the meteorological department forecast weak rainfall for a second consecutive year. In addition, an expected US Federal Reserve rate increase that year could prompt outflows from emerging markets such as India and weaken the rupee, creating another source of inflation.
Accad said the Indian government would face a difficult situation in the second half of the year. Confidence had been strong after the Bharatiya Janata Party’s election victory, driving a stock-market rally of more than 30 percent. Confidence had since weakened, reflected in a 0.5 percent decline in annual returns.
Lower inflation had allowed monetary easing and created a favorable environment for private investment. However, authorities needed to accelerate reforms, including improvements to project approval requirements. The government had little time to act before rising price pressures forced the central bank to stop easing.