What The Future Holds

Source: Dec 12 2014 : The Times of India (Pune)

What The Future Holds

Sumant Sinha





Stars align themselves in India's favour as 2014 draws to a close

As 2014 winds down, it was really a year in two distinct parts. The first, breathless and leading up to elections, had the economy bumping along at the bottom with 4% growth rates, no visible hope, policies or new investments. For the second part beginning end-May , hopes and expectations rose and there were some policy pronouncements.The new government clearly means business, and in a first for India stated clearly that it is “pro-business“. What does this and other global developments augur in the next year?

First, the macroeconomic backdrop at the beginning of 2015 could not be more different than the same time last year. Inflation is trending down and getting into RBI's comfort zone to the extent that in the last credit policy meeting the RBI governor, while keeping rates steady , was constrained to remark that we would likely see a monetary easing early next year.

Interest rates are already on the way down with the 10-year Gilt moving below 8%. As inflation moderates further and RBI finally responds, chances are that rates will trend down further by another 100 to 150 bps over the course of the year. This will be good for investments and consumption demand and take the economy to a higher trajectory of growth, since the single biggest driver of economic growth remains cost of capital.

The rupee has settled into a band of RBI's liking in the 60 to 62 range and in the near future is likely to stay within this range. This masks the fact that the dollar is strengthening against all other currencies, so rupee stability is actually reflective of current account strength ­ in itself bolstered by sharply declining oil prices and capital account inflows.

Coming to oil, sharply falling oil prices are good for India in so many ways ­ a current account reduction of $30 to 40 billion, a fiscal deficit correction of at least 1% due to lower subsidies over the course of a full year, and moderating inflation. In that sense Prime Minister Narendra Modi has been incredibly lucky . But as Napoleon used to say ­ give me a lucky general any day . Indians might well agree with him.

The sense of optimism is palpable.The next budget will be awaited with anticipation as this government's first real budget. Finance minister Arun Jaitley is on record saying that transformational steps can be expected. The recent agreement to pass the Insurance Bill in the Rajya Sabha shows that this Parliament has the capacity to get things done.

This is positive for important future legislation such as the revised land acquisition law, GST Bill and amendments to the Electricity Act. I think that while Indian investors are beginning to chaff at the bit with impatience, foreign investors are still building a wall of expecta tion. This will likely carry on well into next year.

Globally , 2015 will be a rocky ride.Growth in the US will be tempered by concerns about the US Federal Reserve increasing interest rates and the consequent impact on global liquidity and risk aversion. The eurozone continues to fester with zero growth and deflation. It is by no means clear that a quantitative easing programme by the European Central Bank will be launched or will be as effective as the US QE programme.

Japan is grappling with its own demons and despite an $800 billion stimulus by the central bank, it is again not apparent that there will be a real impact beyond stock market appreciation and yen depreciation. The big question as ever is China. The central bank reducing rates there is a signal that a slowdown looms. The rest of the emerging markets such as Brazil, South Africa, Turkey and Mexico are all dealing with structural issues and will exhibit at best moderate growth.

In response to all these concerns commodity prices have moved down very significantly . Coal, copper, iron ore, gold have all declined. Given all this, it is apparent that there will be clear winners and losers in a reordered world economy of 2015. Where is India likely to figure in this?

Being a net importer of commodities, particularly oil, makes India a big beneficiary of this new cycle of global growth. This coupled with our own cyclical upturn will propel growth rates to the high sixes. Now the time is coming for the new government to translate intent into action.

This may already be happening and several actions taken by the government are important in themselves. But the really serious developments are the behind-the-scenes work that is going on with the bureaucracy having to respond more directly to the energy and motivation of the new government, old issues being sorted out gradually , new targets being set and much late-night work happening to convert these targets into policy and legislative action.

Once all this leads to specific new policies and the investment cycle picks up in response, we will undoubtedly see Indian growth pick up to the 8% level again with a return to the virtuous cycle of lower interest rates, higher investments, more consumption, better government finances and external accounts.The world waits with bated breath as the stars align themselves evermore in India's favour. 2015 and even 2016 promise to be good years for India.