Indian Economy – Bright spot, Good not Great - Feedback

India became the world’s fastest growing major economy in 2015. Growth numbers last year were helped by a move by the government to revise the methodology of how the country’s GDP was calculated, resulting in much higher figures. It continues to be the only bright spot standing in the BRIC mix as has been accepted in Davos last week. Russia is troubled by recession, dwindling forex reserves and falling crude prices, Brazil is economically contacting under the not so liberal policies of its leadership and China has a problem of slowing global demand and rising labour costs.

India’s GDP grew by an annual rate of 7.4 per cent in the July-to-September quarter, putting it firmly ahead of China, where growth slowed to 6.9 per cent in the same period. But India this month slashed its growth forecast to between 7 and 7.5 per cent for the financial year to March, compared with an earlier range of 8.1 to 8.5 per cent. 2015 was a year in which the Indian economy started recalibrating itself to international best practices of evaluation. The Reserve bank worked as an independent institution and dealt with the 2 mandates it intrinsically has – Inflation and currency. Albeit low, the Indian currency saw significant stabilization around the 62-63 levels to the $ till Chinese RMB devaluation pulled it to 67.  Inflation has been reigned in through liquidity management of the banks. Key interest rates were not changed under political pressure. The Indian economy will become substantially robust from the supply side if banks can deal with the NPA’s they are accumulated with. The other initiatives that will help supply side are issuance of new payment bank licenses and expansion of money market catchment through Jan Dhan yojana. The complete supply side recovery is going to be slow but robust and could take well over 1-2 years to transform. The silver lining however is that easy credit has disappeared from the Indian financial system.

The other major contributors to the supply side are foreign funds that come in through FDI & FII routes. FDI in 2015 grew by 24.5 % to US$ 44 Bn. This was primarily because some key sectors in India opened up and FDI norms were relaxed. The government also settled long pending tax issues like the retrospective tax and some others. FII’s pumped in US$ 43 Bn into the Indian markets and a big part of that in the debt markets.  The M&A play and startup investment space has also seen significant uptick. The live threat to FII investments in the near terms will be interest rate growth of the US Fed and the Chinese RMB movement. The long term outlook looks robust.

The Indian economy has made considerable progress in the last one year. However, the growth has been uneven and driven majorly by private consumption and public investment. For robust and sustainable growth, private investment and exports needs to revive. This will happen when the US and European economies start looking up. India relies heavily on oil imports and lower prices will help reduce the import bill. The key driver of GDP growth in 2016 will be falling oil and other commodity prices which will help improve corporate margins and household purchasing power, while also improving government tax collections and lowering the subsidy bill. However, there have also been significant negative factors.

Continued weakness in global demand and the second consecutive poor monsoon-season rainfall have hurt growth dynamics.  To stimulate local investments and trade, Reserve Bank of India (RBI) cut interest rates four times last year as inflation eased sharply. Rate cuts had been widely called for by the industry to reduce the cost of borrowing and help stimulate growth. Inflation has been driven higher by a surge in the prices of pulses, including lentils which seem to have been managed but lots more can be done. The consumer price index, a measure of retail inflation, rose to 5.4 per cent in November year on year, with the price of pulses up by 46.1 per cent

In 2015, India benefitted from corruption free structural reforms E.g. Auction of coal and spectrum. It pursued with Adhar and some financial inclusion schemes (Jan Dhan), licensing of new payment banks.  Government showed marked commitment to fiscal discipline and adhering to fiscal prudence. It increased public investments, Liberalised sectors like Insurance, Defence and Railways. The trickling effects of these collective initiatives have sustained the economy in a big way. 2016 needs to capitalize on it and consolidate.

About Shankar Khasnis

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