Indian deficit will grow to 6.2% as industrial output shrinks again

According to recent media reports, the Indian Prime Minister Manmohan Singh is about to announce the appointment of University of Chicago professor and former International Monetary Fund Chief Economist Raghuram Rajan as India’s chief economic adviser. They are going to need all the advice they can get because India’s economy is falling off a cliff. In June, industrial output fell for the third time in four months. The contraction was unexpected and deep as industrial output fell 1.8% versus expectations for 1 percent growth. In the quarter, in which the change in industrial output in two of the three months was negative, activity contracted 0.1%. That compares very unfavourably to the 6.9% in Q2 2011.

This is taking a huge toll on government finances. According to Bloomberg, Standard & Poors Indian unit CRISIL expects India’s budget deficit to increase to 6.2% GDP while Citigroup forecast a 5.9% deficit. Both S&P and Fitch have thus downgraded India to negative credit watch.

As I indicated earlier in the year, I expected slowing in both India and China and I expected it to be worse in India and china. And this has been the case so far. The macro background is poor, from the slowing output and government deficits to the trade deficits, worker unrest, excess commercial property building, and residential property boom, to the huge currency depreciation, inhospitable foreign investment environment and the corporate foreign currency liabilities. All of this speaks to a massive macroeconomic imbalances and poor policy stewardship. Standard & Poors has indicated that India could be the first BRIC to lose its investment grade rating.

Jim O’Neill of Goldman Sachs has recently said he expects the BRIC countries to underperform a new set of emerging market countries that he calls MIST for Mexico, Indonesia, South Korea and Turkey. These are the emerging markets to watch, the BRICS are going to struggle as the macro outlook in countries like India looks weak. If we are to see any sort of countervailing surge to work against the global slowdown, we will need to look to the MIST countries most.