Acche Din Economics

Acche Din Economics

Two early indicators of economic recovery in this country historically, are the stock market and property, both seen to be rising together on positive ‘sentiment’. Elsewhere in the world, it is usually one or the other. Both are poised for growth in India now, with the stock market having proved itself to be the path-finder. And this, without benefit of a global bull-run alongside, though the West is indeed awash in liquidity. Over $ 21 billion of FII investment has come into the stock market in 2014 so far, taking the Sensex from 20,000 to 26,000, with a view that it is headed for 40,000 by the end of 2017.

Those entities that work in the Indian property market including international agencies such as Knight Frank have gone on record stating that developers and related construction industry insiders are confident that demand as well as sales will recover soon. The Union Budget push to REITS to help finance a construction revival is also expected to attract at least $10 billion in short order.

With the BJP/NDA winning a substantial majority for the first time in 30 years, the mood has changed quickly from gloom to euphoric hope. This, on the back of both domestic and foreign investment cheering expected reformist measures, such as an updation of the labour laws, sharply improved governance, movement on infrastructure bottle-necks, growing manufacture, and higher FDI limits in the process for a whole slew of sectors.

The international rating agencies such as Standard & Poor, Moody’s and Fitch have stopped threatening down-grades, despite still high  fiscal deficits, low GDP growth tending higher at last, and many other indicators of an essentially stagnant economy on a recovery path.

In the 60 plus days since assuming power, the Modi Government, to the surprise of some who may have been expecting more flamboyance, has quietly set about restoring confidence, toning up governance and maintaining continuity. It has avoided controversial moves, preferring to go in for the low-hanging fruit of better administration to perk up the economy quickly.

This, while simultaneously initiating a massive infrastructure and reform based programme, for various sectors including farming, defence, insurance, e-commerce, power, housing etc.,  designed to transform the country in the medium term.

Governor Raghuram Rajan of the Reserve Bank, in his latest review, maintained status quo yet again, keeping the Repo rate at 8%, while slightly increasing liquidity via the SLR and other measures.  The future expectations however are positive. The monsoon has already been better than anticipated and the threat of flood and drought is fading. Inflation is moderating, Rajan expects the economy to  bring it down to 8% by 2015 and 6% by 2016. Manufacturing, core sector indicators and exports have picked up, foreign exchange reserves are sufficient, and the rupee is stable. The threat of higher oil and gas prices has also receded.

However the non-performing asset (NPA) figures of public sector banks, some fuelled by collusion and corruption, the burden of coping with farm loan waivers announced by certain states, and the pressure of funding various welfare programmes and subsidies, is putting a load on  the nascent recovery.

Still, the happy data will grow by the time the next Union Budget proposals are presented in February 2015. We are likely to see 5.5% GDP growth this fiscal, with an upward trajectory going into the future.  Rajan hinted that interest rates will be cut if inflation comes down, though the time-line he anticipates takes us into 2016. This may well be bettered on the ground, as current growth accelerates.

Big-ticket foreign investment in manufacturing and infrastructure is expected to commence arising out of Prime Minister Narendra Modi’s forthcoming visit to Japan, and his later meeting with President Xi of China in particular.

Some other US, Israeli, French,  South Korean and European interest in  select areas such as White Goods, Automobiles, Defence Production, Nuclear Power Plants, Agricultural modernisation including food processing and cold chain development, the Indian Railways, Power and Alternate Energy, Roads, Ports etc. should also come shortly. Some progress on single brand retail will contribute and the bilateral moves made so far within the SAARC region may also accrue some mutual commercial and economic benefits.  With all this put together, the promise of acche din is beginning to see fruition.

A decade ago, in 2004, when Congress unexpectedly won enough seats  to cobble together the UPA, it did so with massive ‘outside’ support from 60 MPs from the CPI/CPM.  The vulnerability to the Left initially spooked the stock market, which promptly tanked. This current Government has no such coalition pressures except for a weakness of numbers in the Rajya Sabha which can however be overcome by calling a joint session of parliament to pass crucial reform bills.

Between 2004 and 2008 India actually experienced a terrific bull-run in the stock market through massive foreign investment caught up in the ‘irrational exuberance’ of a debt-fuelled rush. Our stock markets went up from around 3,000 in 2004 to over 21,000 plus on the Sensex by January 2008, when the party eventually ended in grief and tears.  The country-wide property market too powered ahead, with investors, speculators and end-users all jostling for space, with one asset class feeding on the other. All the while, in UPA I, the GDP growth rates were close to the double digit mark, sparking ebullient comments on India’s economic future in the comity of nations.

This time around, the consolidation of the Modi Government’s policies, rather than mostly iffy global cues, will be predominant. There will be massive growth not just in the early harbingers of stocks and property, but exponential growth in the real economy. India could well become a $ 6 trillion economy by 2024, representing three times its present size.

(960 words)

August 6^th, 2014

Gautam Mukherjee