Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

2014: The year in which fortunes turned

It's been a busy yearnew government, policy reforms, fall in commodity prices, and geopolitics

The year 2014 turned out to be much better for financial markets and the Indian economy than what most people had anticipated in the beginning. The stock market has had its best run since 2009; current account deficit is now under control, resulting in much needed stability in the currency market; and the pace of disinflation, especially in later half of the year, has opened up the possibility of an interest rate cut, possibly in the first quarter of 2015. The biggest development of 2014, however, was the change of government at the Centre after 10 years.

Although it was clear towards the end of 2013 that the then incumbent United Progressive Alliance (UPA) will be voted out of power in the 2014 general election, the only suspense for financial markets, political pundits and voters was the possible shape of the new government. Ragtag coalitions, either under the leadership of Bharatiya Janata Party (BJP) or a third-front government with the support of the Congress, were possibilities that would have further complicated management of an economy with two consecutive years of sub-5% growth. But to everyone’s surprise, India’s electorate delivered the most decisive mandate in 30 years.

On 16 May, much before the last vote was counted, BJP on its own was in a position to form the government. It was for the first time since 1984 that a single party managed to cross the halfway mark in Lok Sabha, the lower house of Indian Parliament. Consequently, sentiments improved and the stock market surge continued as investors got more than what they had expected. Amid high expectations, BJP-led National Democratic Alliance government under the leadership of Prime Minister Narendra Modi took office.

However, the experience, so far, has been mixed. While the government has made all the right noises and has moved in the right direction with speedy clearance of projects, the possibility of big bang reforms was perhaps overestimated. Also, under the shadow of a thumping majority in the Lok Sabha, challenges in the area of pushing legislations were underestimated. For example, while the government managed to evolve a consensus on the Goods and Services Tax (GST) and has tabled the constitution amendment Bill [The Constitution (122nd Amendment) Bill, 2014], its inability to get the insurance Bill [The Insurance Laws (Amendment) Bill, 2008] passed in the Rajya Sabha is an indication that legislative business in the upper house will not be easy. If the passage of the insurance Bill, which was considered a done deal after the house committee submitted its report, was not possible in the winter session, amending other laws such as on land acquisition (The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013) is going to be intensely difficult in the future. The government has now taken the ordinance route to ammend the insurance Act.

On the international front, the Indian economy and markets adjusted well to global developments. After years of supporting the market with massive asset purchases, the US Federal Reserve ended its quantitative easing (QE) programme, though the policy rates are likely to remain near zero for some time. While the Fed ended its QE, Bank of Japan expanded the scope of its easing programme, and the European Central Bank is seen inching closer to an outright easing. Towards the end of the year, the Chinese central bank was also infusing liquidity into the system and cutting interest rates. While global economic growth may remain soft, the US economy is marching ahead with strong growth. But it remains to be seen if the US can sustain the momentum with a stronger dollar, which will affect exports, and falling oil prices will affect investments in shale oil.

The biggest story from the international markets, however, was the fall in commodity prices, especially oil.

Oil prices have collapsed almost 50% from the levels seen in June 2014. There are various explanations in the marketplace for this fall. Increasing production from unconventional sources is being viewed as a major reason, while some see this as an indication of weaker global growth in future. The fall in commodity prices is likely to benefit net importers such as India; however, the extent of gains is still being debated. Exporters on the other hand are losing out. While financial problems have intensified in countries such as Iran, Nigeria and Venezuela, the focus is on Russia because of both economic and geopolitical reasons. It is important to note that the last time Russia was in trouble and defaulted (1998), the contagion had reached Wall Street through losses suffered by Long Term Capital Management (LTCM), a much celebrated hedge fund with two Nobel Laureates on its Board. So, if the problem deepens in the commodity market, the interconnectedness and interdependence of the financial system can again throw some surprises which are not known and those that the markets are not factoring in at the moment.

Overall, as 2014 draws to a close, your money in 2015 is likely to be driven by the ability of the government to push economic reforms, and international factors such as the actual fallout of falling commodity prices, geopolitics and the capacity of the US economy to sustain the momentum.

For now, starting today, we take you through how 2014 fared for your money and what to expect in 2015 in areas such as insurance, banking, real estate, mutual funds and stock markets.