 "Consumption unlikely to lead economy in the near future")
At the annual Credit & Monetary policy, RBI projected the economy to grow by just 5.7% in FY13-14, which is a full 1% below the government’s target of 6.78%. More importantly, the central bank’s forecast is at the bottom of all other forecasts in the market and above all RBI says there is little room for further monetary easing. What ails the Indian economy and why is the central bank so helpless about it? There are four engines driving any economy, namely Consumption, Investments, Government and Net exports. None of these are firing for the economy at the moment and looking forward, none look like in a position to pull the economy from the rut in the near future.
Consumption which has been the mainstay of the economy for long, has suffered a double blow from higher inflation and interest rates. As the government hiked MSPs to broad base growth benefits, it has resulted in higher income growth for rural India but translated into higher inflation for urban India. Even with the 18-20% CAGR for rural income over the last five years, it is still just above subsistence level and rural consumption can hardly be expected to support growth in the wider economy. The urban consumer in turn has suffered a fall in real income and has started to cut back. Ubiquitous discounts on consumer goods and smaller sizes at lower prices introduced at burger and pizza sellers, stand testimony to a frugal customer. With inflation staying at high levels and the RBI reluctant to cut interest rates, sales of consumer durables like cars too have taken a nosedive. With neither inflation nor interest rates coming down in a hurry, consumption is unlikely to lead the economy in the near future.
In response to the financial crisis, the government had unleashed a huge fiscal stimulus to support the economy. Much of it went into consumption rather than investment. Hence, even as it helped the economy recover; as growth returned, so did inflation. As RBI hiked interest rates to curtail inflation, growth too slowed down and along with it the revenues of the government.
When India was last in a similar protracted slowdown at the turn of the century, the global expansion of 2003-08 played no less a role in pulling the domestic market from the rut. However, this time around, the external sector is more likely to act as a headwind rather than a tailwind. The IMF has already cut the global growth forecast for 2013 while global trade in 2012 expanded at the slowest pace since the mid-1990s, barring the contraction in 2009. The slower than expected growth in China too will hurt, as exports to China have continued to contract. The CAD-GDP reached an all-time high of 6.7% in Q3 FY 13 and has been twice RBI’s comfort level of 2.5% for three years running. Worse still, it is being increasingly financed by volatile debt capital flows. The large CAD and its financing is the single largest factor dissuading RBI from cutting interest rates. There is some hope from the falling prices of global commodity prices especially that of gold. POL and gold account for over half of imports and 85% of the total trade deficit. A fall in price of gold should curtail speculative and investment demand for gold, while the continuing deregulation of domestic fuels should curtail demand for petroleum products.
Investments are the biggest problem and it is where the current problems of the economy will get solved. In this decade India has to become more like China in terms of an investment-led growth story as the easy path of cutting rates to stimulate consumption is no longer an option. However, investments have got stuck in the quicksand of regulatory approvals, land acquisition, rehabilitation and resettlement and contractual disputes. At the start if this calendar year, nearly half of all central sector projects over Rs 1,500 crore are delayed with cost overruns to the tune of 18%. As investments have lagged for a considerable period of time, the potential growth rate of the economy too has come down and aspirations for a 9% growth trajectory are mere dreams at the moment. Still there is no easy way out. Hurdles in the way of investments have to be removed and further investments accelerated.
The author is Chief Investments Officer AEGON Religare Life Insurance
Consumption which has been the mainstay of the economy for long, has suffered a double blow from higher inflation and interest rates. As the government hiked MSPs to broad base growth benefits, it has resulted in higher income growth for rural India but translated into higher inflation for urban India. Even with the 18-20% CAGR for rural income over the last five years, it is still just above subsistence level and rural consumption can hardly be expected to support growth in the wider economy. The urban consumer in turn has suffered a fall in real income and has started to cut back. Ubiquitous discounts on consumer goods and smaller sizes at lower prices introduced at burger and pizza sellers, stand testimony to a frugal customer. With inflation staying at high levels and the RBI reluctant to cut interest rates, sales of consumer durables like cars too have taken a nosedive. With neither inflation nor interest rates coming down in a hurry, consumption is unlikely to lead the economy in the near future.
In response to the financial crisis, the government had unleashed a huge fiscal stimulus to support the economy. Much of it went into consumption rather than investment. Hence, even as it helped the economy recover; as growth returned, so did inflation. As RBI hiked interest rates to curtail inflation, growth too slowed down and along with it the revenues of the government.
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As the government continued spending, the fiscal deficit shot up and the rating agencies put the country on a rating watch, with a negative outlook. Sensing danger, the government went on a belt-tightening spree, brought the fiscal deficit within control for FY13 and has laid a roadmap for further fiscal consolidation. With the government focused in curtailing the fiscal deficit, it is unlikely to help growth. It is much like the US and Europe where too fiscal rectitude while necessary for longer term financial stability, is a near term drag on growth.
When India was last in a similar protracted slowdown at the turn of the century, the global expansion of 2003-08 played no less a role in pulling the domestic market from the rut. However, this time around, the external sector is more likely to act as a headwind rather than a tailwind. The IMF has already cut the global growth forecast for 2013 while global trade in 2012 expanded at the slowest pace since the mid-1990s, barring the contraction in 2009. The slower than expected growth in China too will hurt, as exports to China have continued to contract. The CAD-GDP reached an all-time high of 6.7% in Q3 FY 13 and has been twice RBI’s comfort level of 2.5% for three years running. Worse still, it is being increasingly financed by volatile debt capital flows. The large CAD and its financing is the single largest factor dissuading RBI from cutting interest rates. There is some hope from the falling prices of global commodity prices especially that of gold. POL and gold account for over half of imports and 85% of the total trade deficit. A fall in price of gold should curtail speculative and investment demand for gold, while the continuing deregulation of domestic fuels should curtail demand for petroleum products.
Investments are the biggest problem and it is where the current problems of the economy will get solved. In this decade India has to become more like China in terms of an investment-led growth story as the easy path of cutting rates to stimulate consumption is no longer an option. However, investments have got stuck in the quicksand of regulatory approvals, land acquisition, rehabilitation and resettlement and contractual disputes. At the start if this calendar year, nearly half of all central sector projects over Rs 1,500 crore are delayed with cost overruns to the tune of 18%. As investments have lagged for a considerable period of time, the potential growth rate of the economy too has come down and aspirations for a 9% growth trajectory are mere dreams at the moment. Still there is no easy way out. Hurdles in the way of investments have to be removed and further investments accelerated.
The author is Chief Investments Officer AEGON Religare Life Insurance