2015: HARD TASKS AHEAD!! Calendar 2014 has turned out to be a tad better than 2013. GDP growth has moved into the 5% zone in the current fiscal from sub-5% in the previous two fiscals. Inflation in trending down faster than expected, raising hope of an interest rate cut next year. This improvement in the macro environment is the result of some proactive steps by the government and good luck. The outlook for 2015 and beyond will be shaped by a mix of global developments and domestic policy—especially how quickly and effectively bottlenecks are resolved, pending reforms are pushed through, and private investment cycle gets kick-started. The world economy saw an uneven recovery in 2014 and a similar trend is expected in 2015. The IMF’s October 2014 outlook scaled down its global growth forecast for 2014 and 2015 to 3.3% and 3.8%, respectively, though a 30% decline in crude oil prices translates into a 0.8% improvement in GDP growth for most advanced economies and probably 0.6% for the US, currently experiencing a strong recovery. But it poses risks for energy producers such as Russia where oil & gas fetch 68% of export revenues and constitute 50% of the federal budget. The major economic superpowers, with the exception of the US, are struggling; Japan is in recession, Europe faces very weak growth prospects and China’s gradual slowdown continues. We will have to rely on domestic demand to lift growth. A strong US recovery is good news for some of our export-oriented sectors in manufacturing and IT-ITeS, but it also has a flip side since, with tapering now over, the Fed is preparing for an interest rate hike in 2015. This will widen the rate differential between India and the US and stoke debt outflows. Since India’s debt market is shallow, investors tend to flee in a risk-off scenario. Reduced external vulnerability is unlikely to immunise India from global shocks in 2015 though the country is better prepared to withstand wobbles. India’s external vulnerability indicators are now among the best in emerging economies—and that’s a U-turn from a year ago. India’s import bill has been trimmed by curbs on gold imports, softening prices and cyclical factors such as stagnancy in industry. This has resulted in a sharp drop in India’s current account deficit to below 2% of GDP. After a 40% decline since June, crude oil prices are continuing at low levels. Structural factors (US shale gas) accompanied by weak global demand have more than offset the upward pressure on oil prices from heightened geopolitical tension in the Middle-East and Ukraine. Subdued demand growth and no supply cut by OPEC will lead to a 20-25% decline in oil prices to $75-80 per barrel in 2015. Lower oil prices have helped India keep its CAD under check, trimmed the oil subsidy bill and contributed to lower inflation. A strong political mandate improved business and consumer sentiment and lifted the stock market around 30% in 2014. The government also initiated a number of small steps to de-bottleneck the economy, which provided a mild boost to the economy during 2014-15. Convergence of proactive steps by the government (release of food stocks and restraint when increasing minimum support prices), falling oil and RBI’s firm stance, all have lowered inflation faster than most expected and created room for rate cuts next fiscal. The key challenge is to revive manufacturing activity, turn the private investment cycle around, and boost domestic consumption. That’s a tall order in the absence of counter-cyclical policy tools and a weak global environment. What India does to spur mining, introduce GST, initiate land and labour reforms and clean up bank balance sheets will not only decide the speed of recovery but will also be critical for laying the foundation for a higher medium-term growth path. India stood tall among emerging markets at the end of 2014. With the growth-inflation mix—inflation is lower and growth higher in 2014, and expected to improve in 2015—improving, India has exited the ‘fragile five’ (including Brazil, Indonesia, Turkey and South Africa) group, too. But that’s not enough to uncork the bubbly. Even the reduced external vulnerability is not a given unless structural measures are taken to improve the competitiveness of India’s exports and fix the mess in the mining sector to reduce import dependence.
Posted on: Mon, 12 Jan 2015 06:12:27 +0000
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