A MIXED OUTLOOK WITH SOME HOPEFUL INDICATORS
By S. Sethuraman
As the economy moved into the third quarter and pre-budget exercises got under way for fiscal 2017, Finance Minister Mr Arun Jaitley has sighted a few hopeful signs but still tough hurdles are there to cross before growth can begin to edge toward 8 per cent, a target set for the current year, which has proved elusive.
There is, however, no dearth of euphoric noises day to day from the Finance Ministry even though it has now reconciled itself to growth at 7.3 to 7.5 per cent. It is true that there is now a greater thrust on seeing stalled projects take off at least where infrastructural and financing issues are not insurmountable.
The market is wide open for foreign investors but any significant inflow seems linked to further actions on policy reforms, such as GST, and more credibility on fiscal consolidation, and these are again the cited factors of global rating agencies in not revising credit grade up that India has been seeking over months.
At last, there is some cheer on moving up of India’s ranking in the World Bank’s Index on Doing Business Easier. It is now ranked 130th, from the earlier 142, on a list of 189 countries. This is attributed to significant improvements by India eliminating the minimum capital requirement and a business operations certificate, saving entrepreneurs an unnecessary procedure and a wait time.
But, the Bank says, India has to do more on reforms front to attract investors, such as an early passage of GST, which itself would begin to yield gains only by 2018.
Global uncertainties are adding to an already complex set of issues related to domestic economic management and for revival of private investment with over-leveraged corporates waiting for still better times, perhaps to last till the contours of the next budget emerge in February 2016. The solid rate cut of RBI by 50 basis points recently has had modest impact limited to real estate and auto sectors.
On the other hand, the deposit rates have been driven down further, depriving the community’s ability to increase domestic savings or consumption. Inflation nominally may be at the lowest after some years but prices for the consumer have not lowered. Whereas the fall in oil prices and subsidy cuts have provided maximum comfort to Government, for the consumers it is only a limited pass-through.
As 2015 is on its last legs, global economic recovery and trade volumes ae on a low key. Financial markets have remained unsettled over the last three months, especially after the turmoils in the wake of China’s stock market bubbles and a hefty depreciation of China’s currency to bolster growth of the world’s second largest economy, no longer the primary driver of world economy.
India is less vulnerable to any external shocks at present and there is a momentary sense of relief for all emerging economies and developing countries with the US Federal Reserve’s decision to put off a rate hike at least until its next meeting mid-December. In determining whether it would be appropriate to raise the target range at its next meeting, the Committee would assess progress on both of its goals, maximum employment and 2 percent inflation.
A rate hike not visible before the end of the year, capital outflows from emerging market economies had begun to moderate in recent weeks and October saw an estimated 13.9 billion dollar non-resident portfolio inflows (hot money) after the worst third quarter (July-September), according to Washington-based International Institute of Finance (IIF).
Markets were also cheered by prospect of further monetary easing by the European Central Bank (ECB) in December, given the low inflation in euro-zone, through its bond-buying programme. The Global Financial Stability Report of IMF had said recently that both the euro area and Japan would need to continue to counter downward price pressures.
The latest FED decision to defer a rate hike also falls in line with IMF advocacy that, amid more uncertainty in the global economy, the United States should wait to raise policy rates until there are further signs of inflation rising steadily and continued strength in the labor market. The Fed said on October 28 that after the first hike (probably at the December meeting), the pace of subsequent policy rate increases should be “gradual and well communicated”.
RBI Governor Dr Raghuram Rajan had been vigorously attacking such ‘loose’ monetary policies of advanced nations without regard to the growth and development prospects of emerging market and other developing economies. To this extent, the macro-economic balancing in these economies becomes even more difficult, also at a time China on unsteady economic course throws up some new challenges for the world. Its growth waned to 6.9 per cent in the III quarter (July-September).
India, now the fastest growing economy, assumes it could become the primary driver of growth for world economy, but it must first get its economic house in order. China’s pain is by no means a gain for India, as BJP Government leaders glibly take for granted. The Modi Government has first to address the stress in the banking system, which also needs more capital for the future, as India moves to a higher growth trajectory.
On the fiscal side, there are still lingering doubts whether Government would be able to peg its deficit to the budgeted 3.9 per cent of GDP target. On the one hand, Government claims to have increased investments in infrastructure, mainly roads and power, without cutbacks on social spending. There are some hopeful starts on road development and a bail-out is planned for power sector. Drought assistance would also impact on the current year’s budget.
But on the revenue side, there is considerable uncertainty over disinvestment receipts totalling Rs 69,000 crores assumed in the Budget. Finance Ministry says this is due to unfavourable market conditions with the sharp fall in prices of minerals and metals in particular. It is unlikely these conditions would get reversed before end of current fiscal. In mitigation, Government looks for higher dividends from major public undertakings, which again would depend on their performance. (IPA Service)