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Business News/ Opinion / Global perception and local challenges of the Indian economy
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Global perception and local challenges of the Indian economy

There are some near-term challenges beginning to emerge for the economy

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

The Indian stock market, as reflected by the S&P BSE Sensex, has fallen by at least 2,100 points or 7.1% from its highs and is adjusting to the reality of subdued earnings. Company results for the January-March 2015 quarter, so far, have not been encouraging, though analysts expect things to improve by the second half of the current financial year. The street expects earnings to get better with the improvement in business environment and pick-up in economic activity. Put differently, in the medium term, market movement will largely depend on the pace of expansion in the economy, which, to a large extent, will be determined by government action and implementation of ideas such as increasing capital expenditure.

Interestingly, even as some investors are getting edgy and expect quick government action on various fronts, observations from some of the international institutions that came in this month were largely optimistic about the future of the Indian economy. Encouraged by the recent policy action, rating agency Moody’s, while affirming its Baa3 rating on India, changed its outlook to positive from stable. It said in a statement: “…recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India’s sovereign credit constraints."

The government’s intent to improve the economic environment and action taken in this regard is being recognized. “Growth will benefit from recent policy reforms, a consequent pick-up in investment, and lower oil prices. Lower oil prices will raise real disposable incomes, particularly among poorer households, and help drive down inflation," said the latest World Economic Outlook (April 2015) of the International Monetary Fund (IMF). Growth in India, according to the IMF, will be higher than that in China in 2015 and 2016, making it the fastest growing large economy in the world. It expects India to grow at 7.5% in both 2015 and 2016. Meanwhile, the Chinese economy is expected to expand at an annual pace of 6.8% and 6.3%, respectively.

The World Bank had similar observations about the Indian economy. In its South Asia Economic Focus (Spring 2015) report, it noted, “India’s economy is poised to accelerate on the back of an ambitious reform agenda, and faster growth is expected to further drive down poverty." The acceleration in growth, according to the World Bank, will be led by investment, which is expected to grow at an average rate of 12% between 2015 and 2017.

However, not all are equally enthused. A recent report (India’s Fiscal Roadblocks Could Stall Infrastructure Progress) by Standard & Poor’s presented a different picture. “India’s public finances are less than rock solid due to long-standing cracks in its budgetary system. While the country’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock," the report said. It also highlighted that further reforms will be required on the fiscal front to be able to sustain higher investment spending. Efficient subsidy spending, which can free up resources for capital spending, is necessary to attain and maintain higher growth in the medium to long term. Both markets and policymakers will do well by paying attention to Standard & Poor’s observations. In fact, a financial or commodity shock can not only affect the progress made on the fiscal front, but also the wider economy.

While it is accepted that the economic outlook for India has improved, as has also been highlighted by both the IMF and the World Bank, domestically, there is still a lot of confusion on the actual pace of expansion because of the change in methodology of computation of economic activity. Financial markets are particularly disillusioned by the numbers as higher economic growth is not getting reflected in the earnings for Indian companies.

But that is not the only problem. There are some near-term challenges beginning to emerge for the economy. For one, the reported distress and loss of output in the farm sector due to unseasonal rains can have both fiscal and monetary implications. The monsoon, too, is expected to be below normal, which may further complicate matters.

Also, in recent days, there has been a slight shift in the political landscape, which can have economic consequences. The government of the day, it appears, is facing a perception problem, particularly on the issue of land bill. The “re-energized" and somewhat united opposition is also making things difficult for the government, which is yet to complete a year in office. These headwinds might compel the government to not risk political capital for pushing reforms, which can affect economic prospects. If the government is unable to get the bill passed in the current session of Parliament, it might begin to hurt the economic narrative, built over the past one year, and would warrant re-calibration of expectations, especially in the stock market.

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Published: 22 Apr 2015, 07:21 PM IST
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