Being pessimistic in the first week of the New Year is to play spoilsport amidst the good tidings it traditionally brings. Seasonal spirit is a compelling reason to focus upon the positives, not the least because almost everyone is agreed that nothing could be worse than the year gone by.
The list has to begin with the prospects of monetary easing. Market beliefs are geared towards a reduction in the cash reserve ratio (CRR) at the monetary policy review this January; stock prices have been lifting every now and then in speculation about a CRR cut. More significant is the firm market expectation that the Reserve Bank of India (RBI) will start reducing policy rates sooner rather than later this year. Even if it is baby steps down the stairway, the fact that financing costs will not rise anymore is comforting.
Rupee galore. Photo: Reuters
That’s good for the external sector, too, for when foreign capital flows out of Indian equity markets, it just flees across the border because it can’t hop over into the local debt market, which remains quite restricted. But falling interest rates - in conjunction with the spate of recent liberalization measures - could attract foreign institutional investors into buying Indian short-term debt if the current risk-aversion mode changes course. That is not to say that global factors are the sole drivers of foreign capital inflows, as our policymakers are persuaded. Persistent and high inflation, along with the deteriorating fiscal deficit, has plenty to do with the waning interest of investors as well. Here, too, there are positive signs that price increases are abating: a favorable base effect and the expectation that commodity prices may not rise as rapidly as they did in 2011, although rupee depreciation reduces the shine somewhat.
That leaves us with the fiscal situation, which will get reviewed with the presentation of the 2012-13 budget. Some things never change, many argue. But the New Year spirit can take a kinder look at the ingenuous methods being thought of to bridge the widening fiscal gap; for example, raising $9.5 billion by pledging assets with public banks to contain the adverse effects of bond oversupplies. Whether this succeeds or not, the signal that policymakers care enough to limit the ugly fallout of fiscal indiscipline is not a mean start to the New Year! The rupee appears to be getting serious attention too. The government is looking to ease foreign investment rules to entice sustainable foreign financing in an effort to strengthen the currency.
That policymakers are getting attentive and trying to find solutions to current economic problems is now visible in bits and pieces; for example, the specific monitoring of infrastructure projects by the Prime Minister’s office, the series of new openings for investments by foreigners in debt and equity markets and so on. Skeptics might point to the failed attempt at liberalizing foreign direct investment in the retail sector to counter this. But with assembly elections in five states out of the way by March, policy paralysis might actually loosen up a bit. Indeed, that may be the brightest sign for 2012 as it is further reforms that will provide the impetus required to spur investments and put economic growth back to trend.
Renu Kohli is a New Delhi-based macroeconomist and a former staff member of the International Monetary Fund and Reserve Bank of India.