India: Time to exhibit the latent talent

Dr B K Mukhopadhyay

Undoubtedly the Indian economy has grown at an upright pace ever since the beginning of the economic reforms in 1991. By now India has developed into a trillion-dollar economy on the back of an upcoming agricultural sector, a broader industrial base, coupled with a comparatively stable fincial and services sector. As per the current assessments by the leading world bodies, India is all set to become the world’s third largest economy by the year 2030.

As the things stand now, expectations of achieving a strong industrial recovery are turning to be weak as the growth in India’s factory output slowing to 2.1 percent in March, 2015. In the previous month, the country’s industrial growth rate was 5 percent, and according to latest assessments the 2.8-percent expansion for the entire fiscal year was better than a contraction of 0.1 percent in 2013-14. Index of Industrial Production (IIP) reflects that the main reason for the slowdown was a sharp decline in the growth of manufacturing, which has the maximum weight, from 5.2 percent in February to 2.2 percent in March, 2015. The index for mining expanded by 0.9 percent against 1.9 percent in February; while that for electricity was up 2 percent for March, against 5.9 percent in the month before. During 2014-15, the indices for manufacturing, mining and electricity were up by 2.3 percent, 1.4 percent and 8.4 percent, against (-) 0.8 percent, (-) 0.6 percent and 6.1 percent, respectively as registered in 2013-14.

Is the exterl front quite well? No, a lot of things remain pending. India’s merchandise exports declined sharply by 14 percent in April, 2015 and stood at $22.05 billion due mainly to the overall conditions in the global market, while gold imports shot up by 85 percent. The exports contracted from $25.63 billion during April 2014. The overall imports during April were down by 7.48 percent at $33.04 billion from $35.72 billion.

The trade deficit for April, 2015 stood at $11 billion against $10.08 billion during the same month of the previous year. In fact the trade deficit widened despite a major 42.65-percent drop in oil imports during April 2015 and was valued at $7.44 billion against $12.98 billion in the corresponding month of the previous year.

So far as the imports front is concerned time is ripe for a fresh look, especially how the volume could be pruned. Non-oil imports, including gold, were estimated at $25.60 billion, which was 12.58 percent higher than the $22.74 billion in April 2014. Imports of gold nearly doubled and were over 85 percent higher at $19.65 billion, against $10.596 billion. Commodity-wise, high export growth was witnessed in tobacco (24.28 percent), spices (19.60 percent), ceramic products (15.67 percent), carpets (14.17 percent), handicrafts (13.46 percent), cashew (10.71 percent), drug and pharmaceutical (9.73 percent) and cereal preparations (8.08 percent).

Segment-wise, high import growth was reported in fertilizers (70.70 percent), transport equipment (69.44 percent), pulses (42.45 percent), electronic goods (30.01 percent), artificial resins and plastic materials (19.35 percent), fruits and vegetables (17.03 percent), iron and steel (16.01 percent) and electronic and non-electronic machinery (10.11 percent).

Services export for March, 2015 was also lower by 1.88 percent and stood at $14.04 billion from $14.31 billion earned during the corresponding month of last year. However, services imports during March fell by 7.42 percent and stood at $7.86 billion from $8.49 billion in the like month of 2014.

The Banking and Fince sector looks set for greater transformation in the next 5-10 years by creating up to two million new jobs driven by the efforts of the RBI and Government of India to expand fincial services into rural areas.

Clearly, the asset magement industry in India is among the fastest-growing in the world. Total asset under magement of the mutual fund industry clocked a compound annual growth rate (CAGR) of 16.8 per cent over FY 07-13 to reach US$ 150 billion.

But the very fact remains that the Government-owned mortgage lenders are suffering slippages in their non-performing assets (NPA) and would continue to lose business to private sector players till the Indian economy picks up, if the current trends are of any indication. Actually, many banks are posting profits due to income from treasury operations and others in as much as the credit growth remains muted. Their profits would improve only from lower NPA when economy improves rather than increased business volumes. Though the Government-owned banks command a market share of around 70 percent, yet it would be difficult for government banks to regain from private banks the lost market share.

Global credit rating agency Moody’s Investors Service also expressed a similar view. According to Moody’s, the improvement in the credit profiles of Indian public sector banks will be achieved only in the medium term, given their high levels of impaired loans and weak capital positions. “The improvement in the asset quality of Indian public sector banks for the fiscal year ended March 31, 2015, was margil and much weaker than we had expected at the start of the same year,” accordingly.

Yes, a longer time-frame is needed for the credit profiles of public sector banks to improve, because their asset quality is tied to the slow, multi-year recovery of corporate balance sheets, and the lagging recognition of associated credit costs.

What is more: public sector banks exhibit significant capital requirements over the next few years, but their interl capital generation capacity is weak, while access to equity markets has been difficult.

The banks are therefore highly dependent on the Indian government (Baa3 positive) for fresh capital. But how long the will the government infuse additiol funds into banks as it did in the past? The central government has rightly said that capital infusions into its banks would happen only to relatively profitable banks. But this, in turn, may result in some weak banks getting merged with stronger ones. Given the low capital levels of public sector banks as a whole, the government’s selective approach to capital infusions will put further negative pressure on the credit profiles of weaker banks.

As a whole many challenges are there before India’s economy, which must be faced in a planned way. No short cut solution is there - be it the agriculture sector [where 4 percent growth is still a dream] or other sectors of the economy.

Can we then safely conclude that the various initiatives and developments especially in the media & entertainment, banking & fincial services, automobiles, pharmaceuticals and the FMCG sectors are bound to enhance India’s overall economic growth and make it a force to reckon with in the global economic scerio? Let us keep our fingers crossed!!

(The Writer, a noted Magement Economist and an Intertiol Commentator on contemporary business and economic affairs, attached to The West Bengal State University, can be reached at m.bibhas@gmail.com)