Wednesday 29 April 2015

Now or never for the Indian growth story

In World Economy News 29/04/2015

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Narayanan is used to making high-risk investments at times when there has been uncertainty in the economic situation, as an angel investor with The Chennai Angels. But he believes that India’s economy has turned a corner now, creating a more favourable environment for investment.
“The economy looks good, the atmosphere is positive and the outlook optimistic,” he says. “These are exciting days to be Indian and to be in India.”
Mr Narayanan’s attitude reflects a rising optimism that investment by companies and investors in India is expected to grow — albeit at a gradual pace.
“The investment climate is picking up slowly,” says Soumya Kanti Ghosh, the chief economic adviser at State Bank of India. “That is the only point of concern because most of the action the government has taken is long-term in nature. All this will take a bit of time to materialise. The investment climate has not fully recovered. It is recovering slowly because the consumer sentiments are still weak. Macro numbers look good — but in terms of any tangible developments, I think a couple of months more before we can see that happening.”
Foreign direct investment inflows into India are also set to increase this year, Mr Ghosh adds.
Mr Narayanan says there are signs of investment picking amid government measures to improve the climate.
“Admittedly, a long way to go in practice, but nevertheless the intent is clear,” he says “The intent to also be more transparent in awarding of new and major projects bodes well for external perception as to how business is done in India. That net effect may take another couple of years to become more apparent.”
India’s finance minister, Arun Jaitley, speaking in Washington last Sunday, said that India was “clearly on a recovery path”.
India’s economy grew by 7.4 per cent in the first three quarters of the last financial year, between April and December, compared to 7 per cent during the same period a year earlier, under a new methodology of measuring the GDP that India introduced this year.
India is recovering from what was described as its worst slowdown since the 1980s, with economic growth below 5 per cent in the two previous financial years to the end of March 2014, reported under the old GDP series.
The IMF has predicted that India will overtake China as the fastest-growing large economy this year, with a growth rate of 7.5 per cent.
High inflation levels, which have plagued India in recent years, have also eased significantly. India’s consumer price index, which measures inflation, fell to a three-month low last month of 5.17 per cent from 5.37 per cent in February. Lower oil prices have played a major role in bringing down inflation because India is heavily reliant on imports of oil. The country’s fiscal and trade deficits have also narrowed. A relatively more stable rupee and the strength of the Indian stock markets are other positive factors.
“The good part is there are certain metrics which show that it is moving in the right direction,” says Praveen Sinha, the founder and managing director of Jabong, one of India’s biggest online fashion retailers. “Inflation is very controlled, interest rates are dropping. If you see the investment sentiment — for start-ups and established companies — it is very positive. Employability and new hiring is also very encouraging. Our results will be much better than anticipated because of the conducive environment, which makes it easier to raise further funding if required.”
Strong policies by Narendra Modi’s government, such as the new goods and services tax (GST) expected to be introduced next year, are also helping to improve the climate, he says.
“It is not a clear win but there is better clarity and transparency compared to what it used to be earlier.”
Moves to develop the country’s lacking infrastructure are also good news, he adds.
“We are still waiting for more execution to reach the ground level,” Mr Sinha says. “It will take two to three years.”
Christine Lagarde, the IMF’s managing director, last month described India as “a bright spot” in a “cloudy global horizon”.
“Recent policy reforms and improved business confidence have provided a booster shot to economic activity,” she said.
“By 2019, the economy will more than double in size compared to 2009. When adjusting for differences in purchase prices between economies, India’s GDP will exceed that of Japan and Germany combined. Indian output will also exceed the combined output of the three next largest emerging market economies — Russia, Brazil, and Indonesia.”
India’s young population, with more than half of its citizens under the age of 25, is set to be a major driver of growth.
While here are many positives, “there are some areas of concern”, says VK Vijayakumar, an investment strategist at Geojit BNP Paribas.
“One is the rising NPLs [non-performing loans] of the banking system, particularly of the public sector banks constraining their ability to lend. The recent spike in crude is also viewed with some concern since it might adversely effect inflation and thereby the RBI’s [Reserve Bank of India] ability to cut rates further,” he says. “The ability of the government to push through the bills for land acquisition and the GST also will be keenly watched. Passage of these bills will be a major morale booster for the economy and the markets. A normal monsoon this year will also be crucial for the revival of growth.”
But Mr Vijayakumar says that the county is well on its way to recovery.
“There are no major issues that can hold back India’s economic recovery. India has political stability with a business-friendly government in power. Going by the policy initiatives so far, the government is on the right track. Economic recovery may be delayed by a couple of quarters; but it is inevitable.”
Mahesh Singhi, the managing director of Singhi Advisors, a global investment banking firm headquartered in Mumbai, believes that there are few more hurdles to be overcome to boost India’s investment climate.
“The biggest bottleneck the economy faces is the delay in new projects which is preventing investments by corporates,” he says.
“Unless the centre gets states on board to help get projects restarted nothing will change.”
Mr Narayanan points out that India has reached a critical juncture in terms of investment into start-ups and entrepreneurship, which could play an important role in job creation in India over the coming years.
“It’s now or never,” he says.

Source: The National