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Monday, August 18, 2014

Good News Week


 Good News Week

 Good news for India which imports an ever growing absolute of 80% of its crude oil, is that Brent Crude has come down to a 13 month low.
If this trend keeps up, it will have a beneficial knock-on effect on inflation due to lower petrol, diesel and other fuel prices at the retail pumps too,  in addition to making it easy to take off all remaining subsidies on fuel. This is coming in place of the fear that the war with ISIS and ISIL in Iraq, was going to push up petroleum prices.  

But luckily, the bulk of Iraqi oil, pipelines, and its export mechanism/ports, are all in the south of the country, which never came under threat. Also, the global oil prices never did go up to incorporate a ‘war premium’. But all in all it proved to be a silver lining for India and China, two huge consumers of world oil. 

Cairn India has incidentally just announced very promising onshore gas finds in Rajasthan which when developed will contribute its mite towards India’s energy security.
Governor Rajan at the RBI, working on reorganising the central bank to make it more nimble and useful , is  already buoyed by the fact that the monsoons have turned out quite well, if a little uneven in its favours .

This will, in itself, lead to lower food prices, meaning primarily vegetables, as the cereals and grain have enjoyed a bumper crop from last year. However, because of primitive handling and warehousing, there is always  a lot of spoilage and wastage in the midst of poor people going hungry.
But with lower fuel prices expected to persist, the cost of transportation of foodstuffs and other goods to market will also work lower. Rahuram Rajan may indeed be able to start cutting interest rates soon, thereby enthusing business and industry and improving the investment climate.

The stock market meanwhile, is on a roll. It has received $ 12 billion in FII investment already this year, taking the Nifty above 7800 and the Sensex upwards of 26,000. Much more is expected  in the second half, when the pace of investment from abroad generally accelerates.

In 2012, 65% of the $24 billion total came in the second half of the year, and in 2010 it was 84% of $29 billion that came, all in the latter part. In addition, domestic investors have now joined the rally, inclusive of the mutual funds focussed on equity, and all sectors of the market, ranging from the micro and small, to the medium and large stock indices, are now heading upwards, broadening the base of the bull-market and increasing its stability.  

A healthy stock market growth will assist the Government’s divestment programme of equity in a number of PSUs ,slated to raise anywhere between Rs. 60,000 and 80,000 crores. Private companies also have ambitious plans to raise money from the stock market, and this looks like a very good prospect going forward, particularly with the PSU banks groaning under their burden of NPAs.
However, there are some lurking external threats.  Governor Rajan, famous for having predicted the Wall Street collapse of 2008, three years before the event, is once again warning of an impending financial crisis in the US, brought on by excess liquidity sloshing around, paid for with trillions in borrowed money. This, even as the US has reached the end of its stimulus programme, and might even be looking at raising interest rates  in the future.  GDP growth rates however, in the US and Europe alike, are not encouraging as yet, and unlikely to pick up in an atmosphere of prolonged stagflation.

India, on revival path, towards 5.5% this fiscal, and more, up to 8% in GDP going into 2016 and 2017, is definitely going to remain attractive.  China is being closely watched for signs of distress after its blistering pace of double digit growth, now slowed to around 7% of GDP. But, it seems to be ostensibly coping fine at these levels.
Both India and China, housing half the population, and a good deal of the demand  in the world, will continue to grow faster than most other countries. Of course, the Chinese economy  is already several times larger than ours, and getting ready to rival that of the US. China also runs substantial and globally rare surpluses, but  India has a good chance of narrowing the gap over the coming years.

Of course, India’s early revival to near double digit growth now hinges on massive investment in infrastructure, a certain vehicle for over $ 1 trillion in investment. India is seeking investment from a number of countries including Japan, China and now Singapore, into this sector and others, and there are several other countries keen to  invest, particularly now that the tangle of red-tape is being cut. Some commentators think the Modi Government might have a tough time in motivating the bureaucracy, but Modi himself  is undaunted, having cracked this particular nut in Gujarat before.
At present, the domestic signs are all good, the best amongst both the EMs and BRICS, and sure to get better as the pace of reforms picks up. The Modi Government, with its absolute majority and a  business-friendly prime minister, inspires strong investor confidence. Other reports also forecast a revival in private equity (PE) interest in India.

The Government is also working on revamping the agricultural remuneration scenario to get away from the stranglehold and exploitation of middlemen. The contribution to GDP from the agricultural sector, now at  17%, is going to be enhanced dramatically. Rates of  agricultural growth  nationally, currently languishing at below 3%, need to be  better. Gujarat has turned in 10% agricultural sector growth year on year, and  this needs to be replicated nationally, if we are to banish poverty. 
A new National Common Market For Agricultural Produce with many Spot Markets is being created to take things forward from the present Agricultural Products Marketing Council (APMC) and the Food Corporation of India (FCI).  Combined with a new body tasked to push federalism and authority to the States, things are likely to be transformed.

This new  mechanism is expected to put bigger profits directly in the pockets of farmers, using strong  IT inputs for real-time information flows. It will also reduce huge inefficiencies from antiquated operational methods while creating afresh modern infrastructure for materials handling, warehousing, cold chains etc.   
The potential rewards of these second generation reforms, including those in defence production, insurance, construction, etc. under process, will positively impact the fortunes of  millions of the  urban and rural poor, and become the unbeatable electoral  game-changer going forward.

(1,102 words)
August 18th, 2014
Gautam Mukherjee

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