It's not just India, the global mood is worsening
The US jobs data is certainly a lot better than expected—202,000 jobs were added on average in the last six months, up from 180,000 in the previous six months—and the May consumer credit report shows more consumers taking loans for automobiles and other purchases at the fastest pace since 2010. It’s useful, however, while viewing such data, to take a look at longer trends. Q1 data, out last month, showed dramatically lower consumption- and investment-spend than previously anticipated, but the important thing is the future, not the past. That shows a mixed picture. For one, thanks to the sequester which doesn’t look like its going away in a hurry, government consumption withdrawal will continue to dampen the US growth impulse. The quality of jobs created has been poor, putting a natural ceiling to consumption growth and rising bond yields—1 percentage point between May 1 and July 8, from 1.629% to 2.696%—will surely dampen investment prospects. While there is a big difference in estimates by various bodies—the Fed is looking at 2013 US growth of 2.3-2.6%—some like the IMF are scaling back estimates. From an estimated 2013 US growth of 2.1% in October last year, the IMF lowered its projections to 2% in January, 1.9% in April and 1.7% in the latest update of its World Economic Outlook yesterday.
What is more frightening, however, is what the IMF has to say about the rest of the world. The EU, as is obvious, is far from resolving its problems, which is why, from a plus 0.2% 2013 growth projection in October last year, the IMF lowered this to minus 0.3% in April and has further cut this to minus 0.6%. More than the EU projections, what is alarming is the lowering of growth targets for emerging markets—China’s 2013 growth projections were lowered from 8.2% in October 2012 to 8% in April and to 7.8% yesterday. That’s not surprising given how, after the Chinese economy grew its slowest in 13 years in 2012, June’s PMI is the lowest in the last 10 months.
Equally worrying from the Indian point of view is the steady ratcheting down of global trade growth by the IMF. In October last year, the IMF’s economists had pencilled in a 4.5% global growth. By April, this had been cut to 3.6%, and in the July forecast, this has been further lowered to 3.1%. Given that India’s rupee collapse is largely CAD-driven, and the CAD is more driven by the export collapse than a surge in gold imports, this is bad news. Normally, a slowing in global growth, especially in the US, would mean more forex flows given the excess QE3 liquidity, but what we’re seeing is a curious set of events. FIIs continue to move out, worsening the rupee’s position, which, in turn, further discourages FIIs. The Egypt crisis, meanwhile, is pushing oil prices back up. All told, not the best of times, especially for a government that continues to vacillate on key reforms (see HDFC chairman Deepak Parekh’s speech on the Reflect page today).