Economic Divergence To Persist Until May Elections

BMI View: Economic performance in India remains mixed, with the purchasing managers' index (PMI) for the manufacturing sector recording further expansion in January, while the services sector remained in contraction. This is being driven by the diverging outlooks between consumers and the corporate sector, and will likely persist until the elections in May. Indeed, we believe that businesses will remain cautious due to the lack of policy clarity, while the outlook for consumers is likely to remain positive as political parties implement populist policies.

January readings of the purchasing managers' index (PMI) for the Indian manufacturing and services sectors (from HSBC-Markit) suggest that economic performance remains mixed and we expect this lacklustre performance to persist until at least after the elections in May. Indeed, while the manufacturing sector marked another month of expansion, with its PMI coming in at 51.4 in January compared to 50.7 in December, the services sector recorded its seventh month of contraction. This mixed performance reflects the ongoing divergence within the economy as businesses, on the one hand, are withholding investment due to economic and political uncertainty. On the other hand, consumer spending has been spurred on by generous pre-election hand outs and populist policies by parties vying for political support.

Wary Businesses Unwilling To Spend…

Unimpressive Performance
India - Manufacturing & Services Purchasing Managers' Index

Economic Divergence To Persist Until May Elections

BMI View: Economic performance in India remains mixed, with the purchasing managers' index (PMI) for the manufacturing sector recording further expansion in January, while the services sector remained in contraction. This is being driven by the diverging outlooks between consumers and the corporate sector, and will likely persist until the elections in May. Indeed, we believe that businesses will remain cautious due to the lack of policy clarity, while the outlook for consumers is likely to remain positive as political parties implement populist policies.

January readings of the purchasing managers' index (PMI) for the Indian manufacturing and services sectors (from HSBC-Markit) suggest that economic performance remains mixed and we expect this lacklustre performance to persist until at least after the elections in May. Indeed, while the manufacturing sector marked another month of expansion, with its PMI coming in at 51.4 in January compared to 50.7 in December, the services sector recorded its seventh month of contraction. This mixed performance reflects the ongoing divergence within the economy as businesses, on the one hand, are withholding investment due to economic and political uncertainty. On the other hand, consumer spending has been spurred on by generous pre-election hand outs and populist policies by parties vying for political support.

Unimpressive Performance
India - Manufacturing & Services Purchasing Managers' Index

Wary Businesses Unwilling To Spend…

We believe that companies will continue to sit on the sidelines as operating conditions remain difficult and political uncertainty weighs on the economic outlook. Services sector companies noted that many clients were still withholding orders given the difficult trading environment and this has contributed to the continued contraction in new orders and overall services PMI over the past seven months. Moreover, the lack of policy clarity from both the ruling Indian National Congress (INC) and opposition Bharatiya Janata Party (BJP) have also weighed on business' willingness to invest and spend. Indeed, manufacturing sub-sector PMI data showed that operating conditions within the capital and intermediate goods category continued to deteriorate in January.

…While Consumers Are Cheered By Greater Populist Measures

In contrast, firms manufacturing consumer goods reported new orders and output activity expanding further, responsible for the improvements that the manufacturing PMI figures recorded in January. In our opinion, the strength in production activity in the consumer goods sector reflects a more positive consumer outlook, and we believe consumer spending will remain buoyed by populist measures in the run up to the Lower House (Lok Sabha) parliamentary elections which will stretch from April to May. Consumer spending has been spurred by the government's subsidy programme, which covers a number of necessities such as energy and water. Indeed, in January, the government agreed to the ruling INC's request to raise the cap on the sale of subsidised cooking gas cylinders to 12 from the current nine. In a similar vein, the Aam Aadmi Party (AAP), which recently formed a coalition government in the Delhi elections, has made water free to consumers who use less than 700 litres per day and is in the process of reducing the cost of electricity. Actions by these parties has pressured other states to consider similar proposals, with the Mumbai Shiv Sena-BJP coalition announcing on February 5 that the government will absorb the cost of bus fare increases for the next five years. As such, we see room for consumer spending to record stronger growth and business investment to remain tepid until the elections in May.

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