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Can Growth Be Revived?

Monday, June 11, 2012
By Manik Kumar Malakar

Sometimes in adversity there lies opportunity. So in context the slowdown in the economy should allow the opportunity for an upside for India. Unfortunately, while the theory is fine, India does face some challenges that may hamper or hinder its recovery.

“There have been times when slowing momentum gave way to an upturn,” says Sonal Varma, India Economist Nomura. “The Indian economy is indeed passing through difficult times,” agrees Dr. V.K. Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services. So, in the FY12 period GDP growth has slumped to 6.9% from the earlier 8.5% that we had seen in the 2003-08 period.

While these numbers are indeed pressing, there is usually a possibility of an upturn to coin a phrase that is used in the equity markets. “But India faces two big challenges,” says Varma. The first is the Current Accounts and Fiscal Deficits and the other is weak investment, both of which are co-related.

“We are facing a double whammy of negative global developments and domestic issues,” says Vijayakumar. Governance issues and policy paralysis are some of the main factors. “The government is being blackmailed by some coalition partners on important policy issues,” says Vijayakumar. Thus, it had to roll back or temporarily withhold some of the major policy initiatives announced.

Crucial bills regarding GST, DTC, land acquisition, pension regulatory authority, company law amendment etc. have been hanging fire for quite some time. “These factors coupled with high interest rates have impacted investor confidence,” he continues.

“A culmination of factors such as high inflation and interest rates, loss of business confidence, regulatory uncertainty, policy drifts and slower than anticipated progress in implementation of critical policies had led to the worsening of the investment scenario in India,” says Dr. Arun Singh, Senior Economist, Dun & Bradstreet India.

And then there is external headwind blowing from Europe. “This is adding fuel to the fire. These domestic and external headwinds are acting as major constraints on the economy and stock markets,” says Vijayakumar.

The resurgence of the Euro area crisis and recent weakness in Chinese data suggest downside risks to the global economy. So what does this mean at the end of the day for India’s growth going forward?

“Given India’s twin deficits and fragile recovery, weaker external demand can trigger non-linear effects, such as capital flight, while exacerbating the slowdown,” says Varma. “Domestic and global headwinds are acting as major constraints on the economy and the stock markets,” says Vijayakumar. “The sustained deterioration in investment activity has considerably impeded the overall growth process,” says Dr Singh.

So can growth be revived? Yes, but that will require astute political will. Else, the economy is in for a long downward spiral.

FII flows
“Investors have turned risk averse owing to the uncertain global economic conditions and the present policy scenario in the domestic economy,” says Dr. Arun Singh, Senior Economist, D&B India. Thus, Foreign Direct Investments have remained sluggish in the recent past. FII’s also have turned net-sellers of equities in April-12.

The weak rupee, rising current account deficit, industrial slowdown and uncertainty over policy issues are also expected to have a negative impact on FIIs inflows in the near to medium term. “As a result, India might witness lesser inflows as compared to other emerging countries,” says Dr Singh.

RBI and Growth
There are whispers that the RBI will go in for a rate cut. “Yes, post the weaker than expect GDP growth number announcement, hope has built up. I expect RBI will start easing monetary steps so that growth can come back,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. China has reduced their rates first time in four years, so a possibility of easing in India is increasing.

If the RBI does go in for a RBI rate cut then how much would it be? “We do have some liquidity issues; the total bank borrowing with RBI is around one lakh crore. If the RBI reduces the CRR by 25 bps, than it can add around Rs.10,000-12, 000 crore in liquidity, which will still be lower than the actual requirement,” he says.

Equities’ message to the government
The stock markets are an indicator of which sectors are being hit and which sectors are doing well. “Some FMCG stocks are at their recent highs; some are at all time highs in this bad market,” says Dr V K Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services.

The reason for this? “These segments, powered by domestic consumption, are doing well. The IT sector stands to benefit from the weak rupee but the demand conditions are not very robust,” says Dr Vijayakumar.

On the other hand, sectors that have something to do with the government like infra, mining and telecom are faring poorly. “The message from the market is clear: the government has to put its house in order,” he says.


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