There’s good economic news for the government, but analysts warn the celebrations may be short-lived. India’s GDP grew by a better-than-expected 7.7 per cent last year, official figures showed on Friday, while the rupee leapt after the central bank launched what economists called a financial "bazooka" – a package of measures aimed at propping up the beleaguered currency.
The economy expanded by 7.8 per cent in the final quarter of the year, also beating forecasts.
But economists warn that a slowdown is coming, citing the conflict involving Iran, which has driven up oil prices and disrupted supply chains, and forecasts of the weakest monsoon in 11 years amid fears of a "super" El Nino building in the Pacific.
"Activity has already started slowing and will remain soft," says Alexandra Hermann Prasad, lead economist at Oxford Economics.
The new GDP numbers, helped by strong consumer spending, came hours after the Reserve Bank of India cut its growth forecast for this financial year to 6.6 per cent from 6.9 per cent while holding interest rates unchanged at 5.25 per cent, citing inflation pressures and rupee weakness. The bank also raised its inflation forecast for this year by half a percentage point to 5.1 per cent.
India’s full-year GDP growth of 7.7 per cent compares with 7.1 per cent the previous year, reinforcing its position as one of the world's fastest-growing big economies.
Manufacturing output rose 7.3 per cent year-on-year in the January-March quarter, down from 12.8 per cent in the previous quarter, while construction activity grew 8.4 per cent, up from a revised 6.7 per cent in the previous quarter. Farm output, which supports around 40 per cent of the workforce, grew by 3.6 per cent compared with 1.7 per cent a quarter earlier.
The latest GDP figures were compiled using a new methodology introduced to better capture activity in the informal economy and other sectors as part of a broader overhaul of India's statistics system. However, economists say more work is needed to provide a clearer picture of growth. Last year, the International Monetary Fund raised concerns about India's "outdated" national accounts methodology, giving it a "C" rating for reliability.
RBI Governor Sanjay Malhotra warned at the bank’s meeting Friday of "incipient signs of moderation in some sectors" and said the bank has turned "cautious" on the inflation front.
GDP growth was relatively protected during the fourth quarter from the conflict with Iran, which erupted in February and sent oil prices shooting higher.
But the focus has now shifted to the risks this year, "given the prospect of a prolonged disruption in the supply of critical inputs to downstream industries, higher energy as well as food costs impacting purchasing power and tighter financial conditions," says Radhika Rao, senior economist at DBS Bank.
Assuming an average crude oil price of $95 a barrel, up from around $60 before the conflict, credit rating agency ICRA expects economic growth to slow "to sub-6.5 per cent" in this financial year.
India imports nearly 90 per cent of its crude so every jump in energy prices feeds through into transport costs, manufacturing expenses and household spending. A weak monsoon could pile even more inflationary pressure.
"Going ahead, we remain wary of the headwinds from geopolitical tensions and El Nino-led supply-side shocks. Tightening financial conditions, higher inflation and weak monsoons could weigh on both urban and rural demand," says Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
High energy prices will hit growth, investment, profits and consumer demand, economists say.
Meanwhile, the RBI has rolled out a slew of measures aimed at propping up the rupee after it hit a record low against the US dollar, and the response appeared immediate. The rupee jumped by around 50 paise to 95.24 against the dollar as investors welcomed steps designed to attract billions of dollars of foreign money into India.
The package is intended to protect the economy from the effects of the Middle East conflict while stabilising the rupee, which has been one of Asia's worst-performing currencies this year.
The measures will make it easier for overseas investors to buy Indian government bonds and shares. The government is also cutting taxes on some foreign investments to make India more attractive to global capital.
Malhotra says the central bank is ready to take further action to keep markets stable. "We are fully prepared to do whatever it takes to preserve orderly market conditions," he says.
Some economists believe the new RBI measures could attract between $30 billion and $50 billion in fresh foreign investment over the next year, a welcome boost. India has already seen more than $27 billion exit the stock market this year.
Overall, however, economists remain cautious about the economic outlook as higher oil prices, inflation pressures and the threat of a weak monsoon weigh on growth prospects.