Indian Economic Outlook

I wrote this piece for a magazine recently. Thought I'd get back to more serious posting, rather than the frivolous nonsense of days past!

This was written immediately post the Union Budget Feb 2015.

Indian Economic Outlook

In June 1991, Indian economic policy embarked on a definite change in direction. Jettisoning the planned economic development model that had been followed post-independence – which was marked by the state micro-managing the economy, oppressive controls on the private sector and over-reliance on the public sector – the state decided to play a facilitating and regulatory role, giving more freedom to entrepreneurs and the private sector and opening up the economy.

Since 1991, we have seen two growth spurts - 1994-1997, when the average rate of growth was over 7% and 2003-08, when it came close to 9%. The financial crisis of 2008 created adverse global conditions, weakening some of the growth drivers that the economy had benefited from earlier. In the years 2012 and 2013, we have seen a significant slowdown in economic activity.

The Indian economy is now coming out of some tough times in recent years, which saw steep decline in growth, stubbornly high inflation and a wide current account deficit, but the situation is now improving.

The Indian economy has shown clear signs of recovery in 2014-15, measured by growth in GDP at constant market prices, which is pegged at 7.4% as compared to 6.9% during the year 2013-14 and 5.1% during the year 2012-13. The GDP has been calculated with the new base year of 2011-12 as against 2004-05 under which the GDP was estimated at 5.5% for the year 2014-15 as against 4.7% during the year 2013-14 and 4.5% during the year 2012-13. The base year was last revised in January 2010.

Today, India is set to become the world’s fastest-growing major economy by 2016 ahead of China, the International Monetary Fund (IMF) said in its recent latest forecast. India is expected to grow at 7.5 per cent in FY 2015-16, and it is likely to cross China's projected growth rate. One of the key members of the current government, in an optimistic statement stated that the Indian economy has potential to become a US$ 4-5 trillion economy in the next 10-12 years.

A lot of key indicators support this optimism.

• A largely stable government mandate seems to have increased investor expectations, demonstrated from the approx. 40% rise in the Sensex over the last 12 months. Market Capitalization has also grown at the same levels over last year.
• Fund raising activity has seen an increase in recent times. Indian companies have lined up initial public offers (IPOs) worth at least INR 8,000 cr in 2015 to fund business expansion and meet working capital requirements on expectations that the bullish trend in the stock markets would continue. IPO market is expected to see some activity in 2015 as a dozen companies have filed draft papers with SEBI for public offers since the new government took charge at the Centre in May.
• FII investment inflow has picked up since the new government came into power in May 2014. Indian markets received approximately USD 38.5 Billion in net FII inflows in FY14-15 (April-January), much higher than USD 8.9 billion in FY13-14.
• PE activity has picked up and we are seeing a flurry of activity in this space with a number of deals announced in recent times. Large global PE funds are expected to increase their allocation to India over the coming years.

The government, which has been elected with a definitive mandate, has signalled it focus on economic development with a slew of measures announced last year. Mr Narendra Modi, Prime Minister of India, launched the 'Make in India' initiative with the aim of giving the Indian economy global recognition. This initiative is expected to boost domestic manufacturing and thereby exports, in the process creating thousands of jobs and enhancing demand generation.

The government also relaxed FDI norms in key sectors like insurance, railways and defence. The recent amendments to land acquisition bill have been keenly espoused by the government with a view of attracting foreign investment to set-up domestic manufacturing capacity in India.

The Union Budget for FY 2016 has signalled its vision for the future. A slew of initiatives and policies are proposed to spur growth in the India economy. Some of the major initiatives to develop to support this growth, include among others, creation of a National Investment and Infrastructure Fund (NIIF), with an annual flow of INR 20,000 cr, 5 new ultra mega power projects (UMPP), 4,000 megawatt (MW) each, proposal to reduce corporate tax from 30 per cent to 25 per cent over the next four years and creation of MUDRA Bank will be responsible for refinancing all Micro-finance Institutions. The government has also proposed a gold monetization scheme to allow the depositors of gold to earn interest in their metal accounts.

To promote foreign portfolio investment (FPI) in India, General Anti Avoidance Rules (GAAR) has been deferred by two years, which will provide a fillip to investors investing through Mauritius. To ease the uncertainty around Minimum Alternate Tax (MAT) applicability for FPIs, it was indicated that the MAT provisions would not apply to capital gains of FPIs prospectively. Pass through status has also been granted to SEBI Registered Category I and II Alternate Investment Funds and also allowed foreign participation in this segment. In a fillip to the fund management Industry in India it was proposed that presence of fund manager in India would not result in creation of a Permanent Establishment (PE) for the FPI subject to certain conditions. This is in line with international best practice. Also, in what seems a revolutionary move, a composite cap on foreign portfolio and direct investments has been proposed by the finance minister to simplify the investment process into India.

June 2014, heralded a marked shift in the foreign investment scenario in India, with the introduction of the FPI regime. Market entry was made simpler through the Designated Depository Participant and since then we have seen a number of new funds enter and/or increase their allocation to India.

It is also pertinent to note that after rising to levels topping 10% last year, inflation is finally showing signs of slowing due to persistent efforts of the Reserve Bank of India. In a mid-cycle announcement, RBI has announced two decreases in the policy rate by 25 basis points each since Jan2015. Further, in a major overhaul of the monetary policy framework, India has formally adopted inflation targeting and will now chase an inflation target of 4% (with a band of plus or minus 2 percentage points).

Strong headwinds remain though in the form of inadequate and out-dated infrastructure, which impacts production and results in supply constraints, rise of NPAs in the banking domain and rising income inequalities. High budget deficits also remain a cause of concern, though the government has signalled its resolve to contain the fiscal deficit to 3.9% of the GDP for 2015-16. The current account deficit has however been aided partially by the fall in oil prices and it is expected that low commodity prices will continue in the near term and thereby aid the growth targets of the country.

In the face of an oncoming Chinese and European economic slowdown and slowdown in other BRICS economies, India is one of the major world economies, apart from the US, experiencing an economic boom. All the above efforts and measures taken by the government and the central bank and initial healthy indicators cohesively point to better economic prospects for our nation.