Indian economy: The challenges ahead

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Now that the year 2013 is coming to an end, let us take a look at what happened in the Indian economy in the last 12 months. The year will be remembered for not being a good one as far as the economy is concerned. The Indian economy recorded its lowest growth rate in the decade during the year. Not just that, high inflation continued to break the back of the common man. The Indian stock markets during the year reflected the impact of the US stance on tapering more than the economic fundamentals and thus failed to cheer investors despite touching record highs.

Going ahead, the year 2014 will be marked by key events such as Fed tapering and General Elections. The macro economic environment is likely to remain challenging and policy triggers in the first half are unlikely to be significant. As such, one can hardly expect much improvement in the Indian economy.

However, there is one man quite sanguine about the economic prospects in 2014-15. Mr. C Rangarajan, the Chairman of the Prime Minister's Economic Advisory Council expects the year to witness growth levels of around 6% -6.5%, significantly higher than the 5% GDP growth in the current fiscal. He expects exports to remain robust and inflation and current account deficit to soften as well.

But we believe that all this is unlikely to come true anytime before the general elections. Even after that, things are unlikely to turn around if there is no strong political will to bring in reforms. Recently, there was news of the Parliament passing the government's demand for additional expenditure of almost Rs 186 bn or US$ 3 bn. Of the total, around 70% is likely to be borne by the government. Again, a major chunk of this would be towards fuel and fertilizer subsidies. While already the fiscal health of India is in a mess, we wonder how the Government will bear such expenses.

In short, Indian economy at present is facing challenges of high magnitude. There is still tremendous scope for the unlocking of growth potential provided the new government begins to take reforms and the implementation of them seriously. Given that taking a call on the economy is not an easy task, investors should base their investment decisions not on the macro factors but follow a bottom up approach while investing. The focus should be on companies with strong business models and sound management which has the ability to steer businesses through adverse times. And in the long term, with proper discipline and persistence, investors are likely to benefit.