Indian economy's a good bet says IMF

Mon, 7 Sep Pre-Open

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Stock market investors have endured nothing but bad news recently. Whether it's the Chinese economy, commodity prices, or emerging market currencies, the global scenario is gloomy. Add the uncertainty about the US Fed's rate hike decision and its clear there's a lot to be afraid about. Investors are nervous. Recently, Jim Rogers exited India.

But is it really so bad?

Not according to us here at Equitymaster. We don't doubt India's long term potential. Several Megatrends are positively shaping the economy right now. It's the short term that concerns us. Reforms are moving at a snail's pace. Regulatory bottlenecks remain. Parliament is stalled. Exports are down. Earnings growth is poor.

Despite all this, a turnaround may be near. So says the International Monetary Fund (IMF). Ahead of the meeting of the G-20 finance ministers, the IMF has stated there is a lot of room for Indian policy makers to boost the economy. It is of the opinion that in the short term, India's growth prospects are favourable and external worries have decreased.

We believe it boils down to your idea of 'short term'. If it's the next few months, don't expect any miracles from the economy. However, over the next 2–3 years, there are reasons to be positive.

The crash in commodity prices will benefit India no end. The country's import bill has fallen to such an extent that the current account deficit (CAD) is no longer a problem. It has also helped to keep inflation as well as the fiscal deficit in check. This in turn has given considerable room to the Reserve Bank of India (RBI) and the finance ministry respectively.

This is the crux of the IMF's argument. However, this does not mean that India should abandon prudent policies. We believe the government must stick to its targets as far as reducing the fiscal deficit is concerned. Any budgetary savings due to lower crude prices must be used to fund infra projects and not subsidies.

Thankfully, the RBI is on top of things. Interest rate cuts have been gradual and have not stroked inflation. While there is a lot of scope for further rate cuts, inflation risks must always be kept in mind. The IMF too has acknowledged this.

It is high time the government got its act together. It must not lose this chance to implement reforms like GST. The country may never again get such a golden opportunity to grow in a low commodity price environment.