Is an economic revival for India around the corner? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is an economic revival for India around the corner? 

A  A  A
In this issue:
» Consumer prices in India remain high
» Is global manufacturing improving?
» Has the emerging markets story ended?
» India's apathy towards energy security
» ...and more!

Has the Indian economy become more stable in the past one year? As per an article in the Economist, certain data points might indicate so. For instance, even at 5%, India's growth is still higher than that of many countries. Foreign reserves are likely to cover financing requirements in the next year 1.6 times (this would be the current-account deficit plus short-term debt). Although the fiscal deficit remains high, government spending is no longer as reckless. For instance, in a scenario when a deficit of 10% of GDP seemed quite likely, cuts in spending and fuel subsidies would mean that the overall deficit at the end of FY14 should be restricted to 7% of GDP. Even the rupee, which has been really weak and volatile, could eventually help boost India's competitiveness and provide some sort of a boost to manufacturing.

But is this enough? Is the Indian government happy with a stable environment as opposed to a growing one? Could an economic revival be just around the corner? Does not appear to be so. There are many indicators infact which show that an 8% GDP growth looks quite ambitious in the medium term at least. Gross domestic savings and gross fixed investment have been dipping. Even if this is still about 30% of GDP and healthy as compared to other countries, the fact remains that higher consumer price inflation has been steadily taking its toll. There is not much capital investment being done and the quality of it too seems to have deteriorated. As per the Economist, capital investment by private firms that build factories and buy machinery, has dropped from 14% of GDP in the year ending March 2008 to below 10% at present.

Then there are more pressing structural issues which have been ignored for quite some time now. These include acquiring land, power shortages and various bureaucratic hurdles. Thus, while the certain reforms have been announced by the government to encourage foreign direct investment into the country, inability to tackle the above mentioned issues will not eventually see much action on the FDI front.

It does appear that the current government is taking heed of various problems and is looking to find solutions. But that extra push that such a radical reform process will require has still not been displayed. And what is more, expecting reforms of the kind we saw in 1991 also appears quite remote. With elections just around the corner, the current government would just prefer to play it safe. Thus, one should probably not expect wonders from the Indian government at least till the elections take place. What happens after that is anybody's guess. In the nearer future certainly one will have to deal with the pain of a weaker rupee, firm fuel prices and high inflation all of which are a burden on the government's deficit.

Do the current economic indicators in India show that an economic revival is just around the corner? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
The fall in the whole sale price index (WPI) may have cranked up the pressure on the Reserve Bank of India (RBI) to lower rates and spur growth. But consumer price inflation has refused to play ball. While consumer prices in India may have eased a bit, they still continue to remain high. Certainly when compared to its peers in the developed and developing world. The main culprits are of course food and fuel. Good monsoons this year should hopefully take some steam of food prices unless the government once again plays truant when it comes to storage and distribution. Fuel prices could also pose a problem at least in the near term as long as the weakness in the rupee continues. Till such time then, the central bank may very well be wary of cutting rates.

*May 2013
Data Source: The Economist

Pick up any newspaper these days. You'll be forgiven if you come to the conclusion that emerging markets no longer seem to be the flavour of the season. There are protests galore in the once happy countries of Turkey and Brazil. Then there's China who comes under fire everyday for stuffing its economy too much debt. The less said about India the better. Its currency seems to be in a perpetual free fall as foreign investors make a stampede for the exit door. Thus, all of this would obviously make one wonder if the emerging market story has come to an end. Ruchir Sharma, the head of emerging markets at Morgan Stanley doesn't seem to think so.

He argues that current scenario in emerging markets certainly looks chaotic. But only in comparison to the peaceful period these economies have had over the previous decade. Therefore, what was an aberration is the previous decade and not the current situation. The explosive economic growth these countries witnessed between 2003 and 2010 was mainly on account of cheap liquidity coming in from the west. And once that dried up, Government reforms or the lack of it was left totally exposed, leading to sub-par economic growth and rising income disparity. Thus, from here on there will be no tailwinds that will lift up all emerging economies. And therefore different emerging economies will show different characteristics based on where they are on the governance and reforms front. Quite an interesting insight we should say.

What would be the reaction to a ban on import of oil and petroleum products? No prizes for guessing that the impact would be far worse than the ban on gold imports. At least that seems to be the logic which the government is following. For Indian policy makers believe that gold is a dispensable commodity the purchase of which weighs heavy on economic prospects. Oil on the other hand, whether due to poor exploration or otherwise, should be imported to keep the economy chugging along. While the necessity of oil is more tangible, the key benefit of buying gold to protect against currency risks has been completely ignored. Also no attempt has been made all these years to make India more secure in terms of energy needs to cut down on oil imports. Thus the 'smart move' by the government and the RBI to restrict purchase of gold seems most untimely. Also the correction in gold prices may actually thwart the government's intentions to bridge the current account deficit (CAD).

The global economy has been in a very fragile shape. While some believe a recovery is in the offing, skeptics are unwilling to buy the theory. Given the uncertainty, all economic experts keenly look forward to the monthly purchasing managers' index (PMI) of the major economies. For starters, the PMI is an economic indicator derived from monthly surveys of private sector firms. An index reading above 50 indicates expansion in manufacturing.

So what does the latest data say? As per an article in Financial Times, PMI's rose in the US and the Eurozone in the month of June, barring only Germany. In fact, 22 out of the 28 PMI indices for June released around the world have shown a positive trend.

The good news ends here. China, the world's most important manufacturer has shown a negative trend. Its PMI dipped to 48.2 in June. As per the indicator, an index of below 50 suggests contraction in manufacturing. This puts the world economy on a very shaky path. As such, one should not read too much into monthly data but wait until clear trends begin to emerge.

Ben Bernanke gave the world a bit of a shock a few weeks ago. His announcement that the US Fed would be tapering off the massive QE (quantitative easing) program sent world markets tumbling down. The main reason for tapering the QE program was that the US economy is improving. The Fed estimates US to grow in the range of 2.3% to 2.6% this year and by 3% to 3.5% in 2014. Mr El-Erian, head of PIMCO, questions this assumption of the US Fed. In a recent comment to an international daily, he has given reasons for his skepticism. US grew by a mere 1.8% in the first quarter of this year. The current scenario is not very heartening either. Therefore the forecasts seem to be a bit too optimistic in the opinion of Mr El-Erian. His advice to investors is to maintain a cautious approach as the markets are vulnerable. We could not agree more with his advice. This is why we have been repeatedly stressing on the need for investors to get their asset allocation right. At the same time they should also remain invested in gold as a part of their portfolio. It is best to be prepared for volatility and turmoil rather than react once it hits.

Inflation, low growth and twin deficits are the key threats to Indian economy at present. While the reasons behind the mess are many, one that needs urgent attention is management of energy resources and prices. The value of energy security for any economy can hardly be overstressed. However, as far as India is concerned, the sector seems to be governed by Murphy's Law.

Be it the supply or pricing of energy sources, nothing seems to be in order. A lot of potential has remained untapped due to bureaucratic delays and issues like environmental pollution. Despite having huge reserve to production ratios for oil and coal, the demand supply gap for energy sources is only rising. As such, the shortage is being met through costlier imports of oil and coal. This has made the problem of twin deficits only worse.

The pricing policies in the sector have disincentivized new investments. Even now, the so called reform measures of the Government are far from what is needed. The recent instance of this was the government approving two fold hikes in domestic gas prices. This was done without giving due importance to demand supply factors and transparency. Finally, it is the consumer who will end up burning pockets once the new prices kick in. As far as country's fiscal health is concerned, the subsidies are only likely to go up. Meanwhile, the country is only compromising its independence by relying on other nations for its energy security, often considered the backbone of an economy.

The Indian equity markets traded below the dotted line throughout the day. At the time of writing, the BSE-Sensex was trading lower by about 50 points or 0.3%. Barring stocks from the healthcare, consumer durables and pharmaceutical sectors, stocks across the board were trading weak. Oil and gas and realty stocks were amongst the worst performers. Sentiments surrounding midcaps and smallcaps were somewhat mixed with the BSE-Midcap trading flat, and the BSE-Smallcap Index up by about 0.3%. Other stock markets in Asia ended the day on a mixed note. However, Japan and China ended higher by 1.8% and 0.6% respectively.

04:56  Today's investing mantra
"The intelligent investor is likely to need considerable will power to keep from following the crowd." - Benjamin Graham
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3 Responses to "Is an economic revival for India around the corner?"


Jul 3, 2013

No. The autosector is the bellweather of the economy. It is slowing down consistently threatening even loss of employment. With election and the comcommittant uncertainty, I do not foresee major improvement


kamdar subhash

Jul 3, 2013

all govt policies are not progresive but looks speculative
all minister have disturb econmomy growth .

finance minister say diff and pm say diff planning comm say
diff where is harmany ?
all gdp inflation figures are not clered to understand
Monay and power works in neta has Nationality.
Kranti is emeging soon....let see



Jul 2, 2013

Though I am not pessimist, I do not think that an economic revival for India to be around the cornet. For this there need to be political consensus which is very unlikely. The vote bank politics does not allow reducing subsidy. Even a crorepathi gets subsidy in India. there is no will on the part of the Government to do away with at least some of the subsidies and on the other hand some of the States are increasing the subsidies to new areas. Selling away assets of the government to meet the deficit can never solve the problem and a day may come when the government is not left with any asset to be sold. Therefore voters of this country should look for an administrator with iron hand

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