BackGetting back to 6% growth
For a return to 6% growth, business and investor confidence must rebound, earnings re-accelerate
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Back from the overseas road shows, the finance minister exuded confidence that the economy would grow at 6% or so in 2013-14. How doable is that? The GDP grew sub-5% in the last quarter of 2012 and probably at a similar pace in the first quarter this year. For the momentum to accelerate, private investment must rebound and exports must recover. Neither is happening at the moment.
Signs of a rebound are scarce as the new financial year begins. New capex announcements by domestic firms, a barometer of prevailing ‘animal spirits’, touched a seven-year low in January-March—a 75% year-on-year decline. Corporate result previews indicate that sales growth of Sensex-30 companies was probably the lowest in 12-14 quarters. Earnings’ growth, to which domestic investors respond, is expected to remain below 10% in 2013-14. Despite the flood of foreign investor money, domestic institutional investors are conspicuously bearish; they are waiting for earnings to turn around to return to the markets. An economic surprise index computed by Nomura (an investment bank) that captures the direction and momentum in economic data surprises and is historically correlated with Indian financial markets shows a fall since mid-January and turned negative in the first week of April; this suggests that forthcoming data releases are unlikely to bear good news. The HSBC PMI, another forward-looking indicator, showed slowing growth and inflation momentum in March, while growth in infrastructure industries – 38% of the industrial production basket—contracted in February.
The fundamentals remain weak too. The FM said the current account deficit will surprise by its small size (it was 6.7% of GDP in the December quarter) next. Just for a quarter though, due to seasonal factors. A sustained improvement can be ruled out due to declining trends in both exports and invisibles and an increased propensity for imports. The sobering realization—persistence of a large current account deficit for some years—came from none other than the Prime Minister in a recent speech. Economic stability is susceptible to external financing risks therefore. In the immediate context, it is notable that global risk sentiment is unusually split: it is risk-on in the US and Japan, but risk-off in emerging markets. Within the latter group, risk sentiment is driven by fundamentals and earnings growth, so the BRIC countries are facing a drought while the ASEAN nations attract foreign capital.
In short, there is little to indicate an economic pick-up at this point. It is a measure of the depth of the downturn that lower-to-stable commodity and oil prices are failing to uplift an economy normally exceptionally receptive to such stimulus.
How much can all this change in a highly uncertain political context? The lengthening political shadows have foreclosed any meaningful reforms, for which there is little time left now. For a return to 6% growth, business and investor confidence must rebound, earnings re-accelerate. Where can this come from? On the positive side, ample global liquidity combined with inexpensive market valuations limit the downside risks to financial markets; improving fiscal parameters with some pick-up in new orders in road projects and power plants are good portents on the real side. In this environment, a quick revival of government spending with accelerated project clearances from the Cabinet Committee of Investments are the best bets to revive growth.
Renu Kohli is a New Delhi-based macroeconomist; she is currently Lead Economist, DEA-ICRIER G20 Research Programme and a former staff member of the International Monetary Fund and Reserve Bank of India.
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