Though the elephant has started moving, poor macroeconomic factors threaten to restrict its pace.
It was a big boost for the beleaguered Indian economy. In early July, a World Bank report placed India as the world's sixth-largest economy for 2017. In fact, India had surpassed France to occupy the prestigious, sixth spot.
Weeks later followed another blockbuster of a surprise that seemed to silence cynics who were mocking India’s ascent on the global economic front. On August 31, the Central Statistics Office announced that the country’s economy had grown by a whopping 8.2 per cent in the first quarter (Q1 – April-June 2018) of 2018-19 as against 5.6 per cent growth in the Q1 of 2017-18.
By registering blistering 8.2 per cent growth in the Q1 of FY19, India had retained the tag of the world’s fastest-growing economy. The Q1 figures, which were beyond all expectations, had come on the heels of robust 7.7 per cent Gross Domestic Product (GDP) growth during the Q4 of 2017-18 (January-March 2018).
There have been more promising developments in the past few months which seem to indicate that the Indian economy is turning buoyant again. The Index of Industrial Production (IIP) for June – the latest available official data that was out last month – had surged at its fastest pace in five months at 7 per cent as against 3.9 per cent in May.
The IIP data, which tracks a wide range of products in mining, manufacturing and electricity sectors, had contracted by 0.3 per cent in June 2017 because of destocking by businesses ahead of introduction of the Goods
and Services Tax (GST). The cumulative growth of the factory output for the April-June 2018 quarter stood at 5.2 per cent over the year-ago period when it had recorded a dismal 1.9 per cent rise.
The vibrant revival in industrial production for June was led by a robust pick-up in the manufacturing segment. Some 19 out of 23 industry groups had ended the month on a high note, with production of consumer goods and capital goods expanding by 13.1 and 9.6 per cent respectively.
Incidentally, the biggest relief for the government came from the most unexpected quarter. Gross non-performing assets (NPAs) of the banking sector, which have been giving many sleepless nights to policy-makers, fell by Rs 21,825 crore or 2.1 per cent to Rs 10,03,000 crore in the June 2018 quarter from Rs 10,24,825 crore in the March 2018 quarter.
This was the first time in five quarters that NPAs of the country's banks actually declined, providing a sliver of hope that the vexed bad loan issue was finally making some progress. "Fresh slippages have mostly been from the watch-list, and the high provision coverage ratio of companies gives confidence that by the end of FY19, banks will start reporting growth in net profit," notes Vineeta Sharma, the head of research of Narnolia Financial Advisors.
Adding to the euphoria was the booming stock market, with benchmark indices Sensex and Nifty hitting their lifetime highs of 38,700 and 11,600 respectively. The Indian bourses' second-longest and ongoing bull run since 2014 (the first-longest one spanned between 2003 and 2008) has seen the Sensex surging from over 21,100 to more than 38,400 and the Nifty soaring from more than 6,200 to over 11,500.
On the face of it, the Indian stock market appears to be unstoppable in its upward journey. The benchmark indices have been bullish for the past four years - barring a few brief spells of downturn. They have continued to surge even in the face of some of the biggest negative developments, be they the global tariff war, the rising crude oil price or the plunging rupee.
However, a closer examination reveals that the market rally has been fuelled by only a handful of stocks of the 30-share Sensex and the 50-share Nifty. In fact, the true nature of the rally becomes evident if one compares the performance of the benchmark indices with that of mid-cap and smallcap indices. Since January this year, the Sensex and the Nifty have each risen by over 10 per cent. During the same period, the BSE Mid-Cap (comprising 99 shares) and the BSE SmallCap (constituting 852 scrips) indices have each plunged by more than 11 per cent. "The broader market, excluding the top 10 stocks, shows a 10 per cent fall. Overall, the all-time high level of the Sensex is only an illusion as it is led only by 10 stocks," points
out G Chokkalingam, the founder and managing director of Equinomics Research.
Sadly, the current market boom is too thinly spread and, for all practical purposes, developing into a dangerous bubble. Money being poured by foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) - especially mutual funds through their systematic investment plans (SIPs) - is getting concentrated into a very few blue-chip stocks, which have been sustaining the bull run. It would not be out of place to note that the benchmark indices do not even reflect the stock market, let alone representing the economy. No wonder, the equity market boom rages on unabated despite not-so-buoyant corporate earnings and poor economic fundamentals.
In short, the current market rally appears unsustainable in the long term. Moreover, the few, rosy, macroeconomic numbers in recent months, especially related to the IIP, are transient in nature. On the other hand, high crude oil price - hovering around $75 a barrel - and plunging rupee that has breached the 70 mark to a dollar - pose a real threat to the Indian economy.
Geopolitical factors, such as the US' sanctions on Iran and Venezuela and a cold war between the Organziation of Petroleum Exporting Countries (OPEC) and American shale oil producers, has taken the Brent crude oil to around $75 a barrel from below $30 in 2015. The high oil price is certainly bad news for India, which imports about 80 per cent of its total requirement.
India had imported 220 million tonnes (mt) of crude oil in 2017-18 for $87.7 billion at an average price of $60 per barrel and at an exchange rate of Rs 60 per dollar. The country had earlier set an import target of 227 mt of oil for $108 billion for 2018-19 at an average price of $65 per barrel and at an exchange rate of Rs 65 per dollar. With the oil price rising to around $75 per barrel and the rupee depreciating past Rs 70 per dollar, the country's oil import bill will rise substantially to around $115 billion.
The rising oil import bill, to a great extent, has led to India's trade deficit - difference between merchandise imports and exports of a country - ballooning by a whopping 57 per cent in July 2018 to $18.02 billion from $11.45 billion in the year-ago month. Moreover, mounting imports of electronic gadgets and gold, the other two categories of Indian imports after crude oil, have further fuelled the burgeoning trade deficit.
The expanding trade deficit is also set to upset the country's Current Account Deficit (CAD) - difference between a country's import of goods and services and its export of goods and services. According to analysts, the country's CAD is expected to surge to $76 billion (2.8 per cent of GDP) in FY19 from $49 billion (1.9 per cent of GDP) in FY18.
The interplay of weak rupee and
"Fresh slippages have been mostly from the watchlist, and the high provision coverage ratio of companies gives confidence that by the end of FY19, banks will start reporting growth in net profit."
VINEETA SHARMA Narnolia Financial Advisors
rising imports is playing havoc on the economy. It is making imported goods costlier and also pushing up the country's trade deficit and CAD. At the same time, rising imports are fuelling demand for the dollar and further weakening the rupee.
In fact, the rupee has been one of the worst-performing currencies among emerging market peers, registering a nearly 10 per cent fall this year. The weak currency has prompted the Reserve Bank of India (RBI) to intervene in the foreign exchange (forex) market occasionally - unlike frequently in the past - to sell dollars and shore up the rupee. This has partly brought down the country's forex reserves to just a little over $400 billion from a record $424 billion in April this year.
The country's forex reserves have also depleted as a result of lower foreign investment into the capital market - both stock and bond markets as well as flight of capital from India to the developed world, especially the USA. The US Federal Reserve, the American central bank, has gradually begun hiking policy rates with its economy looking up again. This has resulted in flight of capital from emerging markets, including India, to the US as returns turn lucrative in the American market. Foreign investors have pulled out $6.7 billion from Indian stocks and bonds so far this year, sending the rupee into a tailspin and thus shaving off the country's forex reserves.
Meanwhile, inflation - both based on Wholesale Price Index (WPI) and Consumer Price Index (CPI) - has reared its ugly head again as costly oil and other imports stoke prices. Interestingly, the July WPI and CPI numbers sprung a pleasant surprise by easing to 5.09 and 4.17 per cent respectively. The lower rise of inflation was mainly on account of cheaper food articles, especially fruits and vegetables.
However, the CPI inflation, which the RBI has been mandated to target, is still above the central bank's comfort zone of 4 per cent. Moreover, the RBI is rightly alert about hardening oil price, falling rupee and larger-thanaverage increase in Minimum Support Price (MSP) for Kharif crops, among others. This has prompted the RBI to hike the Repo Rate - the rate at which the RBI lends money to banks for short term - twice by 25 basis points each in June and August to 6.50 per cent. The rate hikes, the first since October 2013, signal a return to hard interest rates once again.
With the 10-year, government, benchmark, bond yield inching closer to 8 per cent from around 6 per cent last year, further hardening of interest rates cannot be ruled out. "Given the upside risks to inflation, another policy rate hike cannot be ruled out. However, if there is an escalation in
"The State governments working proactively on ease of doing business are getting better investments and business interest, and the Central government's ranking of States has played a good role in that."
RAKESH BHARTI MITTAL
trade war risks and a resultant global output compression, the RBI then could be prompted to stay on a prolonged pause," opines Abheek Barua, the chief economist of HDFC Bank.
The man on the street may stare expressionlessly at high-sounding terms, such as trade deficit, CAD and hardening of rates. But he certainly feels the pinching prices of essentials even though he may not be well versed with CPI and WPI inflation.
The double whammy of rising crude oil price and rapidly-depreciating rupee is set to roil the economy. Moreover, the twin actions will also have profound impact on the common man. The high oil price will leave no sector untouched as it is the fuel that keeps the modern world ticking.
As trade deficit and CAD rise, they lead to flight of foreign investment from the country's markets and businesses, weaken the rupee and fuel inflation, thereby burning a hole in the pockets and purses of common people. Moreover, the RBI's counteraction to tackle both foreign investment outflow as well as inflation is to hike policy rates. This brings a hard interest rate regime into play and raises the cost of funds.
High borrowing rates do affect everyone from triple-A-rated corporate houses to micro, small and medium enterprises (MSMEs) to farmers as well as home loan borrowers. But barring big-ticket corporate entities which have access to multiple sources of credit at cheaper rates - all other categories of borrowers will find it tough to access loans in the first place. Besides, if they do succeed in securing loans, they end up repaying them at high rates of interest.
The flip side of the high interest rate regime is that savers get to benefit from high returns on their savings. However, a sad story playing out in India - an economy that prides itself for its high savings rate - has been a declining rate of overall savings from 34.6 per cent in 2012-13 to 30 per cent in 2016-17, the latest available data.
And the worst dip has been seen in the household sector, the largest contributor to savings in the economy, from 23.6 to 16.3 per cent during the period under review, reveals a report of India Ratings and Research. The report has cited a host of factors, including high inflation that tends to eat into disposable income and the recent demonetisation, for the country's eroding savings rate. "We need to make households trust financial markets so that savings can move from physical to financial assets which would generate better returns," notes Renuka Sane, a professor at National Institute of Public Finance and Policy (NIPFP).
The state of investments in projects and businesses, in the meanwhile, is not encouraging either. According to recent data released by think-tank Centre for Monitoring Indian Economy (CMIE), Indian companies announced new projects worth Rs 2,05,000 crore in the quarter ended June 2018. The figures are 35 per cent lower from Rs 3,15,000 crore of new projects announced in the quarter that ended March 2018 and 22 per cent lower than those in the June 2017 quarter.
Besides, Gross Fixed Capital Formation, a measure of investment spending, has fallen to 28.5 per cent of GDP in FY18 from 34.3 per cent in FY12. As a result, average capacity utilisation in the manufacturing sector has slipped to around 70 per cent from above 80 per cent four years ago. A combination of lower demand, highly-leveraged balance sheets of India Inc as well as bad debt-battered banking sector has led to private sector investments sliding year after year. Moreover, the interest rate cycle turning high again further dampening the outlook on investments.
Lower investments tend to hamper job creation. However, jobs are an area where there is a serious lack of reliable data. According to the government's first-ever estimate of payroll count based on Employees' Provident Fund Organisation (EPFO) subscription and data from the Employees' State Insurance Corporation and the Pension Fund Regulatory and Development Authority, over 35 lakh jobs were added in the formal economy in the six months between September 2017 and March 2018.
However, the sixth and the seventh Quarterly Employment Surveys (QES), conducted by the Union Labour Ministry, show that only 2 lakh jobs were created between April and September 2017. Although the two sets of data are from different periods of time, a huge variation in the number of new jobs created only further muddles a matter as vital as job creation. The number of new EPFO accounts could be a reflection of the employment situation. However, it does not take into consideration duplication of accounts and those com-
"The broader market, excluding the top 10 stocks, shows a 10 per cent fall. Overall, the all-time high level of the Sensex is only an illusion as it is led only by 10 stocks."
MD, Equinomics Research
panies not registered with the pension fund body.
"What the EPFO figures can tell us at best is if jobs are being added in the formal sector. It is difficult to draw short-term conclusions from EPFO data because employers file their EPFO returns sporadically," notes Ravi Srivastava, a professor at JNU's School of Social Sciences. Whether it is the EPFO data or data culled from the QES, it is time that India had a reliable source of job creation data. Moreover, India will have to hasten the process of job creation to accommodate 1.2 crore people entering the job market every year.
If there is so much of divergence with regard to jobs data in the formal sector, there is little that can be expected from the informal sector. The state of farm and other allied sectors does not paint a very rosy picture. Unfortunately, unrest in farms across the countryside stands out more prominently than agricultural prosperity.
Agriculture and allied sectors grew by 3.4 per cent in 2017-18 as against 6.3 per cent growth clocked in 201617. Barring FY17, the farm sector has had a bleak show in recent times, expanding by 1.2 per cent in 2015-16 and growing by meagre 0.2 per cent in 2014-15.
Meanwhile, a recent report of the Committee on Real Sector Statistics put out in the public domain last month needlessly generated more heat than light. The report contained the much-anticipated GDP back series data, which was calculated by taking into account the new GDP methodology. The data showed that the Indian economy had twice grown by over 10 per cent, and the years of growth happened to be in the UPA regime. As expected, there was more political noise between the ruling NDA government and the Opposition Congress Party. Unfortunately, political oneupmanship will take the country and the economy nowhere. Instead, the need of the hour is more structural reforms.
The way out
To be fair, the Narendra Modi government has rolled out many bold and far-reaching reforms in its tenure so far. The biggest of them, of course, is the GST, which finally saw the light of day last July after almost two decades of many missed deadlines. The rollout of GST, one of the biggest tax reforms in independent India, did disrupt the economy during the initial months. But a series of changes in procedures and tax returns has made the GST more business-friendly and brought a large number of traders into the tax net.
Enactment of the Insolvency and Bankruptcy Code (IBC) of 2016 is yet another structural reform that has replaced several, dispersed and outdated bankruptcy statutes into a single Act and attuned it to the modern, complex and ever-changing world. The new bankruptcy law has created a definite framework for resolution of banks' NPAs.
Around 5,000 cases relating to debt resolution have been referred to the National Company Law Tribunal (NCLT). The agency designated for corporate debt resolution has disposed of 2,750 cases, while 1,988 cases are pending before it. Moreover, the bankruptcy law has helped resolve three of the country's first, 12, largest NPAs by handing them over to new promoters.
The government has breathed new life into the economy by providing a major thrust to a new, integrated, infrastructure programme, involving
"What the EPFO figures can tell us at best is if jobs are being added in the formal sector. It is difficult to draw short-term conclusions from EPFO data because employers file their EPFO returns sporadically."
Professor, JNU "We need to make households trust financial markets so that savings can move from physical to financial assets which would generate better returns."
building of roads, railways, waterways and airports. More than 400 stalled road projects have been restarted. The ambitious Rs 6.92-lakh crore Bharat Mala, involving 24,800 km of highways running through economic corridors, border and coastal areas and expressways - has been set in motion.
There has been progress on the Sagarmala project, aimed at expanding capacity of ports. Besides, the government is focusing on inland waterways to harness the mighty rivers of the country for efficient and economical transport solution, apart from boosting rail and air infrastructure.
The Modi government has also unveiled a number of social welfare schemes to uplift the weak sections of society. Surge in Jan Dhan accounts from 12.50 crore in 2015 to 31.60 crore in 2018 and the number of direct benefit transfers (DBT) from 62,000 in 2015-16 to 1,90,000 crore in 2017-18 has put financial inclusion on a fast track of expansion. The Pradhan Mantri Ujjwala Yojana, aimed at enabling poor households access to LPG, ranks among the government's best social schemes with 3.87 crore subsidised cooking gas connections.
In fact, it would not be wrong to say that the Union government has largely executed most of the reforms that are under its ambit. It is now time for the States to expedite their part of reform measures to initiate the muchneeded structural changes in the economy.
The Centre has set a laudable goal of doubling farmers' income. But this target will only remain on paper if the States do not join hands with the Union government. Higher MSP and farm loan waivers are more like bandaid solutions. The States must wholeheartedly push forth e-NAM - a national online market platform - and the new APMC (Agriculture Produce Market Committee) Act to provide farmers with greater market access. Besides, harnessing technology for farming, strengthening and extending irrigation infrastructure, adoption of contract farming and encouraging food processing industry will go a long way in enriching the farming community.
Ease of doing business (EoDB) is another area that needs immediate attention of States. India has been moving up the EoDB ranking in recent years. Besides, the Centre has begun a good practice of getting States to compete among themselves for excelling in EoDB. At he Sate level, there is a need to reduce the number of permits required and hasten various approvals needed to start projects. "The State governments working proactively on ease of doing business are getting better investments and business interest, and the Central government's ranking of States has played a good role in that," opines CII President Rakesh Bharti Mittal.
Meanwhile, the Centre and the States should also collaborate in a meaningful manner to get the grand schemes and projects, like Smart City, Digital India and Start-Up India, among others, rolling on the ground. This can infuse new life into the economy as well as help generate large-scale employment opportunities. The Centre should especially design new financial products for investors who are moving towards stocks and mutual funds from gold and land. This can spur savings rate which has been on the decline in recent years.
Citing a recent IMF report in his Independence Day speech last month, Prime Minister Modi had noted that the Indian economy was now like a sleeping elephant that had woken up and started running. The elephant has indeed woken up and begun walking. But the Centre and the States must now join hands to ensure that the elephantine Indian economy sustains a high growth rate for the fruits of growth to reach down to the last man.
Prime Minister Narendra Modi: Getting the elephantine Indian economy up and running
Benchmark indices do not even reflect the stock market, let alone representing the economy.
Structural reforms, like GST and bankruptcy code, have helped in hastening economic growth.
Government has breathed new life into the economy by providing a major thrust to infrastructure development.