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Economy: Future shock! - Views on News from Equitymaster
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  • May 17, 2005

    Economy: Future shock!

    A famous quotation states, "A chain is only as strong as its weakest link." If one were to consider the Indian economy of the present, there are a number of such links that (can) threaten to stall the ongoing economic run-up. Most prominent among these are government policies, monsoons and changes to interest rates. Let's move upon them one at a time.

    Government policies
    The progress towards economic reforms, which seemed to have stalled post the formation of a new government at the Centre, is currently going on at decent pace. However, there remains internal bickering within the coalition partners relating to difference in ideologies, like the reservation shown by the government's Left partners on the FDI policy. If the government with its Left partners continues to get involved in solving their respective ideologies, rather than taking stock of the management and administration of the economy, it may slow its reflexes in responding to a given situation. Consequently, growth might suffer.

    As per a latest release from the Indian Meteorological Department (IMD), the monsoons this season are likely to be normal. Despite this assurance, concerns loom large on the 'actual' performance of monsoons considering the 'not so correct' predictions made by the IMD in the past. This is because the large proportion of our population (around 60%) depends on the monsoons for its livelihood. And if something goes seriously wrong on the monsoons front, apart from the agriculture sector, the industrial sector would also get a hit owing to reduced demand. This could impact the economic performance in FY06.

    Rise in interest rates
    With the WPI inflation hovering near the 6% level (as per RBI's website), there remains an uncertainty whether the Reserve Bank of India (RBI) will raise interest rates in order to cool a heating economy, a hint of which was given in the latest monetary policy announcement when the central bank raised the reverse repo rate. Also, while prices of some key commodities (like steel) have receded in the recent past, they still lie at their historically high levels. As such, rising prices on account of rising input costs might also put additional burden on India Inc.'s profitability, thus derailing the government's objective of meeting its revenue targets through corporate and other taxes. This might then slow down the government's initiatives towards infrastructure development and other developmental activities. Also, the fact that the US Federal Reserve has been 'long-time' hinting at increasing the pace of interest rate hikes it might send a cue to the Indian central bank to resort to a similar policy. Thus, if interest rates were to rise, the populace (especially the middle class), which has been at the forefront of consuming by borrowing, might slow down the same. This might dampen economic growth in this fiscal.

    So, what's the weakest link?
    While we are not trying to be doomsayers, what we have indicated here are the key possible risks to India's growth in the current fiscal, which might consequently have an effect on the way Indian equities perform. While all the three factors mentioned above have implications that could slow the growth of the Indian economy in FY06, we believe that any 'shock' on the monsoons front can have the maximum effect. Also, the fact that it is beyond human control makes the situation even more perilous.

    Now, even while the UPA government has initiated its movement on the reforms path through increased initiatives in improving standard of living of the rural poor, proper implementation still remains the key. And if the government fails on the implementation part, it would only be flirting with a sustainable growth of the Indian economy and the development of its masses. After all, flirtation, in its true sense, means - attention without intention!



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