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Threats to Indian economy.. - Views on News from Equitymaster
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  • May 27, 2005

    Threats to Indian economy..

    'Severe drought across the country', 'global economic depression' or 'Left parties stall all reforms', which of these newspaper headlines would scare you the most? Difficult to make a choice, as each of these would take the 'India shining' story for a toss!

    We had asked our investors as to which of below normal monsoons, global slowdown or sluggish reforms, impact the Indian economy the most. While a majority (41%) considered below normal monsoons to be the doomsayer, 31% considered the global economy to have the prime impact while 28% felt that a slowdown in reforms would bring the India growth story to a staggering halt. While each view is appropriate in a certain respect, the impact of said 'threats' remains varied. Here we have tried to analyse the same.

    Below normal monsoons: Although not a significant contributor to India's GDP, agriculture continues to be the source of livelihood to 60% of the Indian population. Even today agriculture is at the mercy of the rain gods. The yawning socio-economic gap between the agricultural producers in different parts of the country handicaps the impact of technological advancements in this field. The small farmers (who are a majority), due to lack of funds and technical facilities (for irrigation) are subject to the vagaries of rainfall, which unfortunately is not always equally distributed.

    Monsoon across meteorological subdivisions
    2000 2001 2002 2003 2004
    Excess/Normal 9 28 15 20 11
    Deficient/scanty 27 8 21 16 25
    Total 36 36 36 36 36

    It is not just the rural economy that endures the impact of poor monsoon but the same filters into the corporate books also. Corporates (especially FMCG and consumer product manufacturers) who have saturated their product in the metros are now looking at the rural areas for market expansions. A slowdown in agricultural outputs will have a cascading effect on the disposable income of the rural economy and the corporates' targeted markets.

    Global slowdown: A US Fed interest rate fluctuation or Chinese economic growth today arouses as much curiosity in India as in the respective countries. However, in the past, when the Indian economy was 'sheltered' against the global impacts, this was not so. A yesteryear comparison of the world GDP growth rate vis-a-vis that of India shows that there was very little correlation between the two. The opening up of the economy has brought in its share of virtues and vices. While it benefited us by way of benign business opportunities, it also exposed India to the vagaries of the international economies. As a result of which, the Indian GDP growth seems to be tracing its broader counterpart for the past couple of years. A global slowdown, therefore, can have a shoddier impact today than it did before.

    Sluggish reforms: Reforms are determined by the necessities of business dynamics in the domestic and international markets. The need to make the domestic companies globally competitive drives the reforms. Needless to say however, that their execution depends upon the willingness of the companies and their governing bodies (which includes the government, sectoral bodies, central bank etc). Sluggishness in such reforms stagnates the growth prospects of the companies and sectors.

    Where is India heading?
    The Indian economy has been historically paranoid about the monsoons. Despite the maturity of the economy from a primarily agriculture based one to a service oriented one, a disappointment on the projected rainfall is bound to send the economy into a tailspin. Although the Met continues to be bullish on the June clouds, the accuracy of their predictions has left much to be desired in the past. Global slowdown looks unlikely in the foreseeable future with the emerging economies (which includes India), holding promise. Finally, thanks to the economy's coming of age, the ruling political party in the country (be it NDA or UPA) is bound to be a 'reformist', as the clock now cannot turn back. So all said, while the long term prospects of the Indian economy continues to be enthusing, certain negative shocks (like poor monsoons) may prove to be bumpers on the way.



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