India's Economy: Sunny Days Ahead?

Dr BK Mukhopadhyay

Moody’s assigns a ‘Baa3’ rating on India, with a stable outlook. Global credit rating agency Moody’s Investors Service said the lower oil prices is expected to alleviate India’s high inflation and spur economic growth. Its research report “Global Macro Outlook 2015-16: Lower oil price fails to spur global growth” said India and the US stand out amongst some of the beneficiaries of lower oil prices. “For India, high inflation has been one factor constraining growth in recent years, which the fall in oil prices will alleviate. This will provide tailwinds to already positive conditions,” Moody’s opined.

According to Moody’s, lower oil prices, which are expected to be sustained, would in principle provide a significant boost to global growth. Lower oil prices will weigh on net oil exporters’ growth. Among some net oil importers, a number of factors will offset the windfall income gains from the lower oil price, accordingly. At the same time it has also been rightly viewed that “…..There are some beneficiaries of lower oil prices; among the G20, the US and India stand out”.

The IMF, while terming the new government’s reforms as “promising” but insisted that their implementation is key, assessed that India is expected to grow at 6.3 per cent this year and 6.5 per cent in 2016 by when it is likely to cross Chi’s projected growth rate, In 2014. India’s growth rate was 5.8 per cent against Chi’s 7.4 per cent, according to the World Economic Report update released by the Intertiol Monetary Fund. India’s growth rate in 2013 was 5 per cent as against Chi’s 7.8 per cent. India is projected to grow at 6.3 per cent in 2015 and 6.5 per cent in 2016, when it is likely to cross Chi’s projected growth rate of 6.3 per cent, the IMF said. Yes, a lot depends on the speed of implementation.

The latest  UN Report also forecast that there would be a pick up in growth of Indian economy to about 6.4 per cent next fiscal [2015-16], which, in turn,  would drive South Asia’s economic expansion to a four-year high in 2015. “The growth in South Asia is projected to strengthen to 5.4 per cent in 2015 and 5.7 per cent in 2016,” said the UN World Economic Situation and Prospects (WESP) 2015 report…..The recovery is expected to be led by a pick-up in growth in India, which accounts for about 70 per cent of regiol output”, said the report.

Actually, performance in some of the sectors in the recent past raises hopes. The Indian Railways generated Rs 75,986.04 crore revenue earnings from commodity-wise freight traffic between April and December 2014 as compared to Rs 67,705.11 crore during the corresponding period in 2013, registering an increase of 12.23 per cent. The Indian Railways carried 808.57 million tons of commodity-wise freight traffic between April and December 2014 as compared to 769.74 million tons carried in the corresponding period of 2013, registering an increase of 5.04 per cent. In December, 2014, the Railways generated Rs 9,775.45 crore as compared to Rs 8,635.38 crore in the corresponding period in 2013, a gain of 13.20 per cent.

Aviation sector also brings in some good news. Domestic air traffic grew by 9.7 per cent last year compared to 2013, driven by a series of discounted ticket offers by the Indian airlines. Indian airlines together carried 673.83 lakh passengers in the previous year as against 614.26 flown by them in 2013. Of this, private airlines carried 549.58 lakh passengers or 81.6 per cent of the total passenger traffic. The share of the tiol carrier Air India stood at 18.4 per cent as it transported 124.25 lakh passengers during the period.

Revealing the technological capabilities of Indian small and medium enterprises (SMEs) to reach out to the world market, exports of aircraft and spacecraft parts from India went up by a whopping 56.77 per cent to exceed $4 billion during April-November 2014 over the same period in the previous year, according to an EEPC India alysis. Exports of theses products stood at $2.58 billion during April-November period of 2013.  “What is heartening is that they are mostly small and medium enterprises which domite the sector and are adopting the new technology fast, catering to some of the top aircraft and spacecraft manufacturers of the world,”  according to EEPC India (formerly Engineering Export Promotion Council). 

In fact, the major breakthrough for the hi-tech export segment was witnessed in November 2014 when shipments of the critical parts for civil aviation and spacecraft went up by over 317 per cent year-on-year to $1.16 billion from $278 million. 

What is more: after a gap of four years, India’s foreign exchange reserves touched a new lifetime high at $322.135 billion for the week ended 16 January, 2015, driven by higher inflows and lower outgo of Forex on account of a big slump in global crude prices. The reserves jumped by $2.66 billion to reach $322.135 billion during the week. Strong FII inflows and reduction in import burden due to a record fall in oil prices led to accumulation of the reserves.  It may be mentioned here that the Forex kitty for the first time had crossed $320-billion mark ($320.79 billion) for the week ended 2 September 2011.

Large undone things glare so far as the infrastructure, farm sectors are concerned!

Moody’s Credit Outlook rightly noted  that improvement in India’s sovereign rating will depend on the government’s ability to pursue farm sector reforms as they have a bearing on inflation and fiscal deficit……“We expect (farm sector reforms)... will improve the efficiency of India’s food supply chain... because it will reduce inflatiory pressures and the government’s fiscal deficit,” .

All is definitely not well in the economy. But ceaseless efforts backed by clear government policy, could yield a lot.  The fincial sector is yet to witness a giant growth - the non-performing assets of tiolized banks increased sharply from Rs 9,190 crore in 2011-2012 to Rs 2, 16,739 crore in 2013-2014. Again, public sector banks require equity capital of Rs 2.4 lakh crore by 2018 to meet global Basel III norms on capital adequacy. The government has infused Rs 58,600 crore between 2011 to 2014 in the state-owned banks. More should come in a judicious manner.

No doubt high interest rates in India is hurting the economy in many ways and it would be prudent for the central bank to cut rates more aggressively, including another rate cut in the upcoming policy review. The new criteria [the methodology for arriving the amount to be infused in these banks has been based on efficiency parameters - first of all, weighted average of return on assets (ROA) for all PSBs for last three years put together was arrived at and all those who were above the average have been considered, while the second parameter that has been used is return on equity (ROE) for these banks for the last fincial year] in which the banks which are more efficient would be rewarded with extra capital so that they can further strengthen their position, is definitely welcome. The capital infusion should be based on the performance of the bank. Better the performance higher will be the infusion.

The upshot: though some silver lining undoubtedly has been witnessed in the recent past, yet complacency is out of question as the matter stands now. Will India soon see a surge in foreign direct investments, including from the USA, as the country strengthens manufacturing sector under the “Make in India” programme?

(The Writer, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be reached at m.bibhas@gmail.com)