Forecasting Eye
A year ago we predicted that 2018 would be the year of ‘il sorpasso’ where the Indian economy overtook two prominent Western economies – the UK and France. But the sharp fall in the rupee against the dollar has prevented this from happening and so Indian GDP in dollar terms for 2018 is now estimated at $2,690 billion by the IMF compared with the $2,932 billion which Cebr forecast a year ago.
The rupee averaged 67.8 to the dollar in 2017. During 2018 it has fallen to 73.3 after recovering slightly in mid October as oil prices fell back.
There are four main factors that have been driving the rupee down. First has been the rise in the US dollar against most other currencies as a reaction to the Trump trade policy and to the tightening in US monetary policy. This has been particularly marked against emerging market economies – even China has had to let the RMB sink. Second has been the rise in oil prices in dollar terms as a result of the political tensions with first Iran and subsequently Saudi Arabia. Third has been the sluggishness of Indian exports of goods which has led to (combined with the other factors) a widening of the trade deficit. And fourth has been capital flows out of the country which have exacerbated the other problems.
India has been particularly badly hit by the resumption of US sanctions on Iran. In theory Indian oil imports from Iran are meant to come to a halt by 4 Nov 2018. Since India imports about 80% of the oil consumed in the country and about 10% of Indian oil imports in recent years have been from Iran, this has created a problem. Importers rushed to bring in oil before the deadline with a corresponding impact on the trade deficit.
But our medium term view is that oil prices – which rose sharply during 2018 as a result of US trade and sanctions policies – are likely to fall eventually as renewable capacity grows exponentially. The rise in prices in 2018 has boosted energy investment and so paradoxically made lower prices in the medium term more likely. Our prediction is that by 2024 the price of oil will fall below $50 per barrel as supply grows sharply.
Besides oil the other worry about India’s balance of payments reflects weak growth of exports of goods. India’s exports of goods for the financial year 2017/18 were, at $302 billion, no higher in dollar terms than four years earlier. Meanwhile Vietnam, with a population only 7% of India’s, has grown its goods exports from $100 billion to $250 billion over the same period. Admittedly India’s exports of software and IT services are much more buoyant, reaching $111 billion in FY 2017/18 and growing by around 8% annually. The weaker currency should help boost exports eventually but the main impediment to growth is not price but red tape and problems with infrastructure (it is currently estimated that transport costs are 18% of total costs in India compared with about a quarter of that in advanced economies).
India liberalised its policy to inward investment both in 2017 and in January 2018 and mid year data indicate that investors have responded with direct investment flows covering a quarter of the trade deficit, up 23% on a year earlier. The additional capacity that this is generating, particularly in the IT sector (over half the inward investment is in the tech sector) will boost exports in the coming years. Meanwhile, despite the weaker currency, Indian domestic investment in 2018 has been strong – up 11% when measured in rupees. Eventually strong growth in investment (and the government is predicting an increase at an annual rate of 14%) should erode the infrastructure backlog that has held back growth for many years.
All this and India’s strongly growing population which is yielding a ‘demographic dividend’ will eventually drive India’s GDP above that of most Western economies. We will be releasing our new WELT 2019 forecasts for the 192 countries for which we have data on 26 December 2018 which should show the updated forecasts for the timing of ‘il sorpasso’.
Douglas McWilliams dmcwilliams@cebr.com Tel: 020 7324 2860