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Analysis: India's limping economy threatens to undermine commodity markets

India's economy has shifted into lower gear since the country's general election, posting its slowest growth in six years for the April-June quarter and taking a toll on energy and commodity markets that were already grappling with an ailing automotive sector and a lack of liquidity.

India does not have the deep-pocket capacity of China to turbocharge its economy through investment in infrastructure or pulling fiscal levers.

The Indian government has done what it can, reducing corporate tax rates to 22% from 30% in a bid to boost investment, which is expected to help the country's beleaguered manufacturers. The country's banks have also been recapitalized, but remain burdened with bad debts.

The country's GDP for the first quarter of its April-March fiscal year was 5%, down sharply from 8% the year before, Ministry of Statistics and Programme Implementation data released late August showed.

Growth data for eight core sectors slowed to 2.1% in July from 7.3% the year before, separate Ministry of Commerce and Industry data released early September showed. The sectors were coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity.

Steel and cement growth, closely watched barometers of construction sector health, came in at 6.6% and 7.9%, respectively, for the month, down from 6.9% and 11.2% in July 2018.

The domestic construction sector's gross value added or GVA rate grew 5.7% over April-June, slowing from 7.1% in the same quarter a year earlier and from 9.6% over January-March. GVA is defined as the value of output less the value of intermediate consumption.

Finished steel consumption over April-August was up 6.3% year on year at 42.606 million mt, slowing from the 7.9% year-on-year rise to 40.080 million mt in the same period a year earlier, provisional data from the state-run Joint Plant Committee showed.

"Domestic RM [raw material] spreads for blast furnace operations have slipped below Rupees 21,000/mt [$293.76/mt] and are at a 33-month low," Edelweiss Financial Services assistant vice president Amit Dixit said.

Non-government data also reflected the economic slowdown; India's manufacturing PMI fell to a 15-month low at 51.4 for August, latest IHS Markit data showed.

Compounding the weakness in its construction sector, India's car industry is in a rut amid tumbling sales and temporary production cuts.

Prior to the release of the April-June GDP data, the Ministry of Finance had introduced several measures aimed at spurring vehicle sales, including lifting a ban on the purchase of new vehicles to replace old ones by government departments. India's car industry welcomed the moves, but continued to call for the GST on vehicles to be slashed to 18% from 28%.

This was proving a double-edged sword, as it may have prompted some buyers to postpone purchasing, said Rajesh Jindal, deputy general manager at Steel Strips & Wheels Ltd, a supplier to equipment manufacturers for automakers.

"People will wait to save 10% GST," Jindal noted.

Further measures to boost the industry were also needed after vehicle production fell 12.19% year on year to 12.02 million vehicles over April-August as automakers pared back production to keep inventories to a minimum.


"While the government has announced a stimulus package lowering a tax hike for foreign investors, easing liquidity for the banking sector and boosting auto demand, we nevertheless expect the underlying causes of slower growth [slower private consumption] to persist and hence for earnings growth to remain muted for the next 12-24 months," S&P Global Ratings said in a report.

The Reserve Bank of India in late August transferred reserves of about $25 billion to the Indian government amid expectations the central bank would cut interest rates for a fifth time in 2019.

"Government spending, which was a large engine for driving order books of several corporates, is running into limits. Government borrowing is already at record levels -- Indian Rupee trillion expected for fiscal 2020 -- and sources of revenue are falling short," S&P Global Ratings said.

Also at stake is the country's currency, which is expected to depreciate further after closing at a 10-month low of Rupees 72.39 to the dollar on September 3. A weaker currency typically makes exports cheaper and imports more expensive, increasing the cost of production for businesses that rely on imported raw materials.

The slowing Indian economy is also grappling with weak investment and an underperforming service sector.

India's total oil products demand contracted sharply to 120,000 b/d in the first half of the fiscal year from 315,000 b/d in the same period last year.

India's gasoline demand has remained robust despite weaker vehicle sales, with year-on-year growth of 62,000 b/d over the first seven months of the year roughly unchanged from the same period last year.

However, diesel demand growth has slowed sharply as motorists increasingly turn to gasoline-fueled vehicles, while demand from other sectors has been dampened by the slowing economy. Gasoil demand rose 50,000 b/d over the first seven months of the year, down by half from the same period last year.

"The funding challenges faced by non-bank finance companies in India further compounds the tight credit environment. The weaker price outlook on metals and minerals is another factor for subdued growth, although weaker energy prices will support the cost structure of extractive companies," S&P Global Ratings said.

Source: S&P Platts

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