5 reasons why the worst may be over for Indian economy

India's economy has slowed remarkably in the past two years-from 9.3 per cent in FY11 to 5 per cent in FY13, the weakest in a decade. This has raised market concerns about a prolonged economic slowdown. With market concerns about high bank non-performing loans and limited room to ease interest rates, consensus expectations are for a sluggish growth outlook continuing in FY14. However, the economy could improve going forward, according to a report from Goldman Sachs.
  1. General elections are scheduled for the first half of 2014, and elections are typically accompanied by fiscal expansion in the preceding year, the report states. The Union Budget for FY14 suggests such an expansionary fiscal policy.

    India must make tough spending choices, Finance Minister P Chidambaram had said while tabling the Budget in Parliament, even as he unveiled a bigger-than-expected outlay for the coming fiscal year. Total budget expenditure will hit Rs. 16.65 lakh crore in the fiscal year that began on April 1, 2013, despite expectations for cuts from the last fiscal year levels.
  2. Financial conditions are easing as interest rates are gradually coming off. The investment bank estimates that reduction in short-end rates seen over the past year can increase fixed investment by 5.4 per cent.

    Interest rates have been a key determinant of the investment cycle. The significant easing of rates post-global financial crisis led to a sharp jump in investment activity during 2009-10. Investments started falling from mid-2010, and have continued to remain weak. While a lack of movement on policy bottlenecks and negative supply shocks due to rising commodity prices are part of the explanation for this, a gradual increase in interest rates has also been a key driver. Therefore, a reduction in rates can lead to a pickup in investment activity.
  3. Ongoing policy reforms to de-bottleneck infrastructure and other investments, particularly the Cabinet Committee on Investments, can help.

    There is a significant push from the government to kickstart the investment cycle. Since September 2012, the government has taken a number of steps to boost business confidence and increase activity. These include fiscal, infrastructure, and FDI reforms.  In particular, the Cabinet Committee on Investments, which was created to remove bottlenecks, has met three times and cleared projects in oil and gas, mining, and roads.

    To resolve the shortage in coal supplies, the government has agreed in principle to import coal and 'pool' the higher imported coal price with cheaper domestic coal to ensure coal supply for power projects. Given the priority being given to this, Goldman expects it to happen in the first quarter of FY14.

    The government has announced plans to award 3000 km of road projects over the first half of the current fiscal year in the Union Budget. It also expects to award contracts for the high-speed railway freight corridors in the same period.

    There is a push to make government-owned companies (PSUs) spend their surplus cash to kickstart the capex cycle. Faster land and environment clearances, which the government is pushing for in part through the CCI, will likely also help.
  4. The global economy can act as a tailwind, and the recent decline in commodities prices such as oil and gold will assist the recovery.

    Falling crude prices as well as an appreciating rupee against the dollar gives more room to the Reserve Bank of India to cut interest rates at its policy meeting on May 3 to spur industrial growth.
  5. Some green shoots are already visible in activity data-in Index of Industrial Production, exports, and non-food credit. If monsoons are normal, it may lead to a bounce in agricultural production, and support rural demand.

    A number of economic indicators are suggesting a bottoming out of economic activity. The IIP has shown a gradual increase in qoq terms since November 2012. Encouragingly, this has been driven by the Capital Goods Index, which is a good sign for investment demand.

    Export growth has become positive in year on year terms since the start of 2013, and has been sequentially positive since October 2012. Following several quarters of decline, projects under implementation showed a small uptick in the March quarter.


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