PMI data, Fitch outlook point to a humming economy

India’s economic growth story received an affirmative thumbs-up on Tuesday from cold, hard data on factory output in April — and from the warm glow of sentiments articulated by global rating agency Fitch.

Factory output increased for the fourth straight month in April led by strong growth in new orders. The Nikkei India Manufacturing Purchasing Managers’ Index stood at 52.5 in April, the same level as in March.

The rate of growth of new orders was at a six-month high in April and output increased in each of the three monitored sectors, led by consumer goods.

New export orders rose for the third month in a row although at a softer pace than in March.

Firing on all cylinders “Buoyant domestic demand coupled with sustained growth of new orders from abroad boosted the upturn in total new business... in April,” said Pollyanna De Lima, Economist at IHS Markit and author of the report.

De Lima said the outlook appeared encouraging, with output expected to remain on an upward trajectory amid reports of planned capacity expansions, new product launches, aggressive marketing campaigns and an improving economic scenario.

That robust sentiment was echoed in rating agency Fitch’s reading of India’s economic outlook, and in its projection of 7.7 per cent growth in 2017-18 and 2018-19, against 7.1 per cent last year.

Fitch retained India’s sovereign ratings at BBB- with a stable outlook, which is the lowest investment grade, despite the Finance Ministry’s unsubtle attempts to push for an upgrade. But it nevertheless expressed confidence that the business environment is likely to gradually improve with the implementation and continued broadening of the government’s structural reform agenda. “India’s sovereign ratings balance a strong medium-term growth outlook and favourable external balances with a weak fiscal position and difficult business environment,” Fitch said in a statement on Tuesday.

Reform momentum Fitch lauded the government’s efforts at sustaining the reform momentum for the past three years through measures such as the Insolvency Code, relaxation in the foreign direct investment regime and the soon-to-be rolled-out GST. It also said that efforts to rein in inflation are now bearing fruit and India is also less vulnerable to trade shocks due to its more domestically based economy and strong external finances.

But, it cautioned, “the impact of the reform programme on investment and real GDP growth will depend on how it is implemented and the extent to which the government continues its strong drive to improve the still-weak business environment.”

“Weak public finances continue to constrain India’s ratings,” it noted; it also sensed an uncertainty about whether the government would commit to the debt target as suggested by the expert committee to review the Fiscal Responsibility and Budget Management Act.

Banking sector woes The rating agency further highlighted the challenges in the banking sector, particularly the contingent liabilities of public sector banks. It expects that non-performing loans will rise further to 9.7 per cent of total loans by end of the fiscal from 4.6 per cent in 2015-16. Fitch further pointed out that India’s economy is less developed on a number of structural metrics than many of its peers with low average per capita GDP and weak governance standards.

There were a few other niggling mood downers: the Nikkei India PMI survey revealed that purchasing costs increased for the 19th consecutive month in April, which could dampen calls for a rate cut by the RBI. The rate of cost inflation also gathered pace since March.

Yet, the overall picture, as backed up by both objective data and subjective sentiments, is of an economy that seems to be chugging along nicely.

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