India Outlook: A Self-Inflicted Slowdown

India's economy faces trouble heading into 2012, and Indian policymakers bear much of the responsibility. Activity slowed sharply through the second half of 2011 as a deteriorating global outlook and domestic policy missteps crimped business confidence and dragged on growth. GDP growth fell below 7 per cent y/y in the third quarter of 2011 and will slow further through 2012.

Export growth collapsed from more than 50 per cent y/y through the middle of 2011 to just 3.9 per cent in November. Imports fared slightly better, halving from 50 per cent y/y growth midyear to 25 per cent in November. Industrial production was nudging 10 per cent y/y through mid-2011 but by October, the most recent month for which data are available, output was falling at a 5.1 per cent yearly rate. The broad-based production slowdown saw output of consumer goods down 0.8 per cent y/y in October, pointing to an easing in consumer demand.

Falling investment, production and sales

The prevalent network of informal stores makes it difficult to collect retail figures, but car sales—a decent proxy for middle-class consumption—fell 3.1 per cent y/y in the second half of 2011, compared with a 15 per cent increase in the first six months. Consumer demand has slowed and is unlikely to recover until the second half of 2012.

India’s corporate sector looks particularly vulnerable. Production of capital goods, a gauge of business investment intentions, plunged 25.5 per cent y/y in October. Fixed investment, which surged 12 per cent in 2010, fell 0.6 per cent y/y in the third quarter of 2011.

There is still a fair amount of public investment, especially in roads and other infrastructure. Electricity production remains inadequate—300 million Indians still don’t have access to power—constraining the industrial sector. But private investors have pulled back in recent months amid elevated borrowing costs and weaker demand, coupled with a lack of confidence and government paralysis.