Indian economy in FY15 is more full than empty and next year will be even better

The ADB has projected growth in India to be 7.8% for 2015, which though lower than the 8.1-8.5% projected by the Government of India for FY16, is still impressive as it does mean that it will come over growth rates of 6.9% and 7.4% respectively, in FY14 and FY15. But how confident does the economy look today considering that the same optimism which is exuded by the top line growth numbers has not percolated to the internals?

Quite clearly while the bigger picture is positive; there are several areas that need attention. Therefore the overall performance can be split into three parts – the good, the bad and the uncertain.

What are the positive indicators? The first is overall GDP growth which notwithstanding the conceptual issues has shown an upward trend. Even the multilateral agencies now aver that India will be doing better than China this year and hence there is a major turnaround.

Second, CPI inflation has moved down after being at a double digit level for quite some time. While it is still sticky in the 5-6% range, it is lower than the 6% rate that the RBI had targeted for January 2016. Third, interest rates have moved downwards and while there are expectations of further rate cuts, the pace may be affected by the possible revival in inflation. However, one can still be sure that the rates will not go up during the year.

Fourth, the external situation is quite strong. The current account deficit is well under control at 1.7% of GDP which is very comforting. This has been supplemented by strong capital flows from both FDI and FII. The latter is significant because notwithstanding the inevitability of a rate hike by the Fed, the impact on such flows to India has been minimal. This is also reflected in a relatively stable rupee which is less affected by global influences than other emerging market currencies. The ultimate indicator of the strength of the external account is the forex reserves of a country, and here we are well placed at $ 335 bn – adding almost $ 30 bn this financial year.

Fifth in terms of reforms and policy the government has done well in moving the coal and mining related bills which will be a boost for the power sector in particular while overall industry will be better off with transparency. Also the passage of the insurance bill is a big positive for foreign investors and there is news that several companies are contemplating increasing their stake in their Indian ventures.

The negatives chart is also noteworthy though not really one to cause shock. The first is the state of industry. Stagnation continues to pervade in industrial growth even though the counterpart in the GDP shows steady performance. The fact that consumer goods are decelerating is a concern and evidently households are spending less. Also with the stalled projects not yet taking off, it does look like that the basic and capital goods segments are also dormant. Electricity has been the only shining sector this year which will hopefully benefit from the bills that have been passed on mining.

Second, investment continues to be low as no one is investing in capital. Private industry is not investing due to excess capacity and the government is hesitant due to fiscal constraints. The result is that overall gross fixed capital formation continues to come down. This has been concomitant with savings coming down as bank deposits have grown at a much lower rate this year.

Third, exports growth have been in negative territory which is a concern as it shows that our current account has been under control more due to the decline in oil prices and gold imports rather than any improvement in exports. Therefore, there exists a pressure point here which has to be addressed through policy to an extent though we have to wait for global economic conditions to improve to create demand for them.

Fourth, while prices have come down and is good news, the fact that manufactured prices have now shown virtually nil growth (going by the WPI) means that corporates have been squeezed. Profitability has been under pressure and will continue to be so as they are unable to make similar adjustments in their final prices. The third quarter performance indicates a fall in net profits for the corporate sector; and will probably be replicated in the fourth quarter. It does appear that most of these sectors have lost their pricing power.

The third zone is the proverbial grey area where there is uncertainty on the path. First, the farm sector has presented a confusing picture. The kharif crop was lower than last year but prices have remained stable in the downward direction. However, food inflation remains sticky and could inch upwards given the impact of the unseasonal rains in Feb-March that has impacted the rabi crop. This can be a major pressure point for us.

Second, the government is very much on the fiscal consolidation path with a more realistic budget this time where we are targeting a deficit ratio of 3.9% of GDP for FY16. But we have the same heroic assumption that disinvestment will bring in a large quantum of funds of over Rs 60,000 cr which does not invoke confidence given our low track record on this front. Non-attainment of this target can mean that the government thrust on infrastructure will also get diluted.

Last, while the government has created an enabling environment we have to see the clearance of stalled projects getting translated into action. This can be the clue to growth but the skepticism exists as two successive governments have not been able to get them to move ahead even after clearing the red tape.

On the whole, the picture looks better this year; and in case we are able to surmount the odds and clear the haze over the uncertain elements, FY16 can be significantly better for the economy.