Outlook: Sharp recovery in services sector should support growth in the near term
Services in India have staged a sharp recovery, but a looming US recession accentuates the medium-term growth challenges, says analysts in a report from Nomura.
The Nomura India Normalization Index (NINI) shows the economy is racing back to above-normal levels, led by broad-based improvements across consumption, investment, industry and the external sector.
The key surprise has been the services sector, which was trailing at ~4pp below pre-pandemic levels in March, but is now trending at close to 40pp above those levels.
The Nomura Economic Surprise Index for India (NESII) has risen to -0.05 as of mid-June from -0.14 in mid-May, and “we see scope for more positive data surprises”, says analysts Sonal Verma and Aurodeep Nandi in the report dated 23 June 2022.
The Nomura India Composite Leading Index (NICLI), which has a one-quarter lead over non-agricultural GDP growth fell to 102.3 in Q2 2022 from 104.8 in Q1, indicating some loss in sequential momentum and a slowing underlying cyclical trend.
The Nomura RBI Policy Signal Index (NRPSI), moderated to 0.13 in June from 0.32 in May (between -0.20 and 0.20 implies no change), primarily reflecting lower GVA growth in Q1 2022 and lower CPI inflation in May.
However, the index was in rate hike territory throughout FY22, when policy rates were left unchanged, highlighting that a policy course correction is overdue.
Growth outlook: The sharp recovery in the services sector and the lagged effects of easy financial conditions should support growth in the near term.
“However, we see medium-term challenges. Our new base case of a mild but prolonged recession in the US, tighter monetary policy and high inflation increase the downside risks to growth,” said Verma and Nandi.
“We expect GDP growth of 7.2% y-o-y in 2022, before moderating to 5.4% in 2023, with risks skewed to the downside.” fiinews.com
