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After a new government took charge at the Centre, India received a free pass from the international investment community. The previous government had just about averted a full-blown crisis and most investors were prepared to give the new government time to turn things around. The rupee was under pressure, inflation was in double digits, the fiscal deficit had reached huge proportions and the current account deficit was a cause for worry. If gross domestic product (GDP) was seen in dollar terms, or GDP data was adjusted against consumer inflation, India was in recession, with GDP shrinking. The interim Budget presented by the new government was assumed to be a hurried assessment of status quo. A major point was the new government was committed to retaining the United Progressive Alliance government's fiscal deficit target of 4.1 per cent of GDP.
Everyone expected the new government to get things moving - restart stalled projects and get important legislation passed. Some of that is happening. And, the steep fall in crude oil prices has contributed to a dramatic fall in inflation. But the economic recovery hasn't been as quick as was hoped. In fact, there hasn't been a great deal of investment or pick-up in economic activity. Acceleration in GDP growth might be many months away. In the meantime, the rupee has slid again. The government's fiscal deficit target will be difficult to meet, as 89 per cent of the targeted deficit for this financial year had been reached in the first seven months.
In terms of sentiment, the honeymoon period is over. While the sentiment remains good, next year's Budget and other policy decisions will be received in the spirit of business-as-usual. Given the expectations, if GDP growth doesn't accelerate considerably in 2015-16, there will be disappointment. Through this year, the stock market has delivered a stellar performance, mostly on expectations of improved earnings and revenue growth in 2015-16, though the recent correction has taken a little sheen off the performance. But the Nifty should enter 2015 with a year-on-year return of about 30 per cent.
Investors will, of course, watch overall GDP growth. Both the International Monetary Fund and the World Bank are projecting GDP growth of 6.4 per cent in 2015-16, close to median expectations. This is an improvement of about one per cent of the 2014-15 GDP projections, and will mean an appreciable improvement in economic activity.
In addition, investors will expect macro economic balances to be maintained, with the twin deficits under control. Here, the magic numbers are 2.5 per cent of GDP and five per cent of GDP for the current account deficit and fiscal deficit, respectively. Anything above these will lead to nervousness about macroeconomic stability. Growth of this order will essentially have to be driven by a pick-up in the domestic economy. Global growth is likely to remain weak through the next year, which means growth will not be export-driven. The information technology (IT) and IT-enabled services sectors might not see stellar performances, though the key US market is expanding.
Domestic economic activity could receive a stimulus, as cheap inputs could lead to temptingly priced manufactured goods. Due to the weak global economy, the prices of crude oil and metals are trending down. So are those of electronics, plastics and other metal- and petrochemical-based products. This reduces the input costs of white goods, cars, etc.
It is almost a given that the Reserve Bank of India will cut rates through 2015-16. That means equated monthly instalments will fall for big-ticket items. In such a case, domestic consumption could pick up in terms of big-ticket items. Smart investors will focus on these areas of the economy. On the investment side, private investment flows will restart only on the basis of signals of higher consumption demand.
Public investment (and private, too) into infrastructure could restart only if stalled projects are restarted. It is difficult to estimate the capital stuck in stalled projects; it could be 15 per cent of GDP, or more if one accepts the $300 billion-plus estimates. Also, it is difficult to estimate the new investments required to rescue the sunken capital. As project costs have inevitably escalated, credit lines will have to be renegotiated. This is an area in which the government has to intervene. Problems such as opaque model concession agreements, land acquisition issues, tardy statutory clearances and clashes between multiple authorities are well known and well documented. If a government with stated reformist intentions, parliamentary majority and friendly governments in many major states cannot perform this task, who can?
