The fall in prices of metal, oil, food, and other commodities by 25-75% in the last couple of months is a positive for India's growth, according to HSBC Global Research.
The $10 a barrel fall in the prices of the highly sensitive oil would improve India's GDP growth by 20 basis points, the research firm said in a July 10 note.
These falling prices have been at the back of India's surprisingly robust economic activity, said Pranjul Bhandari, managing director and chief India economist at HSBC. Manufacturing, certain imports, tax collection, government capex, and high-tech export data have all shown resilience on the back of decreasing prices, she told BQ Prime's Niraj Shah.
Factors At Play
At a time of global volatility, it's counterintuitive that India is doing so well, Bhandari said. She attributed India's growth to cyclical and structural factors.
On the cyclical side, she said that India is enjoying the benefits of global growth variability affecting commodity prices.
On the structural side, the growing service export sector of India, the increase in manufacturing of high-tech goods, and gains from public digital infrastructure are positively affecting growth, Bhandari said. All these factors indicate higher GDP growth in the medium term for India, she said.
Channels Via Which Fallen Commodity Prices Prop Growth
Improved Corporate Margins
The falling commodity prices have led to a drop in input prices. However, no reduction in output prices has been observed. This scenario indicates a margin expansion within companies, according to Bhandari. These observations are seen across the board, in both small and large firms. Further, large enterprises are using the new margin to raise wages.
Better Purchasing Power
Domestic manufacturing and exports of consumer durables have recently increased. The drop in commodity prices is likely to have had an impact. The decrease in inflation and increase in wages have simultaneously increased purchasing power. This explains why consumer imports have also risen, Bhandari said.
Stronger government capex
Bhandari highlighted that both centre and state tax revenues have been rising. The increased corporate profitability and improved consumer demand discussed, have led to higher direct and indirect tax collection, which is making its way through to higher capex, she said.
El Niño Trade-off
India could manage the inflation risks associated with the El Nino for a number of reasons: food imports of pulses and oilseeds have become feasible due to falling commodity prices, and India's reservoir levels have been good, especially in the north-west regions, which are at the back of the country's food security needs, Bhandari said. The government's improved supply-side management has helped lower food inflation over the last decade, she said.
However, she emphasised the possible effects it could have on rural market growth. Even if rural construction propositions have been rising, urban-to-rural remittances have been increasing, and the fall in rural inflation is leading to high purchasing power. Agriculture still remains a key driver for rural growth, and the effects that El Niño could have can impact rural market demand in the near term.
Risks At The Horizon
There are three threats to growth momentum, according to Bhandari.
One possibility is that rising commodity costs will harm growth. Second, that El Nino poses a greater risk to rural demand than inflation, while increased fiscal investment could mitigate some of the effects. Finally, sluggish global economy may, briefly, impede the substantial expansion in professional services exports, she said.
Watch the full conversation here:
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.