Indian Economy – Options for accelerating the Economic Growth

Indian Economy – Options for accelerating the Economic Growth

The Indian Economy did very well immediately after the Crisis. The performance in the following year s was better than the expectations. After the growth of 9.3% in F 11, the Growth was down to 6.2% in F 12 and  5% in F13.The underperformance of the Economy continues. In F 14, the growth is likely to be in the range of 6% and

Even till the middle of F11, the potential for the Economic growth was at 10% and it appeared that India would be able to achieve the potential. The  developments in the Global economy and developments in many aspects in the Indian Economy had resulted in deceleration of growth and brought down the potential for growth to 8% today.

Lot of new initiatives were identified by the government to revive the higher growth and action plans are in place and implementations are being addressed. To implement the action plans every segment in the society has to become a partner to the Government. Addressing the crisis requires co-operation of all.  The slowing economy has affected all segments in the society and everybody is keen that India’s economic growth gains momentum. The support for Government Initiatives has to come from all political parties, Judiciary, the regulators , the media and all other segments of the Society.

Agriculture. The growth in agriculture in the last many years was sub par and much below the growth in Industry and services. Year on Year the share of agriculture in the economy is going down. Considering the low productivity of crops in India, the potential for growth in agriculture is more than 6% p.a. Since the prices of agricultural commodities in the open market have become very attractive , by enabling the farmers to realise the high prices, the agriculture growth could be accelerated and the government subsidy to  fertilizer could be reduced substantially.

Apart from inflationary pressure, in recent times, the depreciating rupee has emerged as a major concern.  Current account deficit has become one of the major concerns in maintaining the macro economic stability.  Some of the following measures could be considered for addressing the pressing issues in the economy today.

Measures to correct the Current Account Deficit

·         The current account deficit is mainly due to high imports of oil and Gold and very high value of non essential and consumer products from other countries. Many of the products imported are available in India and only action plans to be identified to make them available to the required customer segments  .

·         To address the current account deficit the following measures could  be adopted.

·         Identify the trade gap with every country with India has  trade.

·         Discuss with  these countries to increase the imports from India.

·         Request all the Diplomats from India to aggressively promote the Indian product imports in the country of their residence.

·         Many of the products imported from few coutnries , are giving competition to the Indian suppliers and sme’s in India. Many of the consumer related products which are imported  could be reduced substantially.

·         Set the quantitative limit for imports of Gold on a monthly basis. Create a campaign for discouraging the purchase of gold for non productive purposes  . Identify action plans for using the unproductive gold in the economic system to meet the demand.

·         Create a nation wide campaign for reduction of fuel use. Encourage people to use public transport. Target a five per cent reduction in use of fuel across industries , homes and offices.

·         Create innovative schemes for investments by NRI’s. Offer sovereign guarantee for these products with reasonable rates of return.

·         Attract more FDI through clearly specifying the policies for FDI in India in each sector  

·         Identify the imported products, which will not be productive in the immediate term.

·         Explore the scope for rupee trade with countries wherever the imports far exceed exports.( Rupee trade would help to reduce the dollar imbalance ).

 

Measures to revive industrial growth

·         Projects above Rs.1000 cr of capex which are stuck due to regulatory and environment hurdles could be cleared by convening the CCI very frequently.

·         The infrastructure projects which are on and stuck due to various issues relating to regulation and environment could be cleared on an urgent basis.

·         The credit flow from banking system to industries had seen a decline. Banks stopped lending to many of the industrial sectors. This was also due to projects in many sectors not bankable today. The sectors which had become unattractive today can be made attractive again by introducing new investor friendly regulations .

·         Mining is a key sector for industrial growth and it has seen a big decline in volumes and there is an immediate need to target a growth of at least 15% in mining in the immediate term and target a growth of 10% year on year in the coming years.

·         Many of the power projects were stuck due to unavailability of competitive coal. Through the proposed MDO model, the output of coal India could be increased by at least 10% year on year and the government can appoint the best MDO operators in the world to increase the output of coal.

·         Automobile industry is one of the key industries in India and it has seen a big decline in demand. Many sme’s and workers’ fortunes are dependent on this industry. The credit flow to this sector including SME’s could be increased and tax incentives could be considered for the short term.

·         The manufacturing council has come out with lot of recommendations for increasing the manufacturing activities and increasing the manufacturing competitiveness of India. The suggestions could be prioritised and take up for implementation without any loss of time.

·         Interest rates. Since there is very little activity on new projects and the inflation has gone up ,many of the industries in India had become unviable. There is a need to reduce the interest rates which will benefit the government, companies as well as individuals.

·         The affordability of interest rates will make the projects more viable and rekindle the consumer boom witnessed in the industry.

·         Land has become very unaffordable for new projects and thel government has to work very closely with each state government to make the land available at affordable rates.  Single widow clearance including environmental clearance for projects  could be created and the large projects can be show cased to the foreign investors ( already for Steel sector similar structure is being created ).

 

Depreciation of the Rupee and its impact on trade and industry

·         Most of the companies left their exposures uncovered expecting that the rupee would move towards Rs.50. The analysts also expected the rupee levels to remain strong.

·         The announcement from the US fed that there would be early withdrawal of stimulus created panic among the investors and they had started withdrawing investments from emerging markets.

·         This has affected the financial performance of many of the Indian corporates in quarter one and despite good operational performance , the companies had to report poor performance. Many of the corporates are sitting on a large unrealised loss on account of sharp rupee depreciation. Appreciation from the present levels would reduce the burden on the corporates. This is also likely to reduce the NPA’s in the banking system.

·         Going forward, the currency could be managed by a narrow band and the frequent communication by the government on new measures to achieve a stable rupee will go a long way in bringing a stability to the exchange rate.

·         Make the country more attractive for NRI investments, FII inflow and FDI investments through investor friendly measures.

·         By reducing the current account deficit through various measures mentioned above, it would be possible to manage the currency within a narrow band.

 

Development of industrial corridors

The proposed  Delhi - Mumbai Industrial Corridor (DMIC), the Chennai-Bangalore Industrial Corridor (CBIC), and the Amritsar-Delhi-Kolkata Industrial Corridor (ADKIC) by the government will give a big boost  to the economy. 

·         These projects will create many large industrial zones and new cities . This will create demand for  more than 300 industries.

·         Since these projects are very large, there is a need to raise resources from abroad.

·         Already Japan is involved in a big way in DMIC. UK and Japan had shown interest in CBIC. World bank has promised to assist in ADKIC.

·         Considering the large size of the projects, there is immense scope for other countries to get involved in these projects.

·         All the countries with large forex reserves and sovereign wealth funds can participate in these projects  and we can invite them to participate in these projects.

·         Indian companies can play a major role in partnering these projects and management of these projects.

·         The government can create many sub projects with smaller size with attractive returns.

·         On the similar lines, now discussions are being held about Chennai – Mangalore corridor, etc.

·         This is the best way to develop the industries. This is the model China followed. For creation of large cities, China had shown interest. Since they are running  a huge surplus with India, the scope for retaining the export proceeds within India to deploy them within India could be discussed with China.

 

Skill development  

·         Despite there is  unemployment, in many cases, there is a shortage of skills.For .E.g. Drivers to drive Trucks and buses. There is a skills mismatch in many professions today. On one side there is a shortage of labour and at the same time, there is an high level of unemployment.

·         Further many professions are unattractive today and dying.

·         The government has already drawn up a plan  for developing skills in the Economy and detailed reports of skill development were prepared for more than 20 industries.

·         Each state has created a skills development council and each state is working on this concept.

·         Industry wise skill development councils were created and they have started functioning.

·         PPP model  has been created and corporates are working very closely with the government to make the initiatives very successful. Corproates are very happy to co operate with the government on these initiatives.

·         These programmes can also be synchronised with programmes for unemployed in rural and urban areas. Since the following projects are being taking on a large scale there is a need for a large number of workers with competitive costs.

 

 

US Economic Stimulus

US Economic Stimulus

The economic  underperformance of the Developed countries continues.  Among the developed countries, US continues to do well. The Q3 adopted by the US government brought some semblance to the global markets and provided stimulus not only for the US economy but also to other economies around the world. The global investors /corporations were able to source low cost funds from US. The low interest loans were available to US corporates, Households and there was a good momentum created in the construction front in the US.

The overall  competitiveness  of US is improving supported by availability of cheap gas. The government has drawn up a strategy to revive the manufacturing sector and there are many new initiatives on the way to regain the competitiveness. The exports of consumer goods and consumer durables from US has started going up.

The announcement that US was about to withdraw the stimulus had a global impact and funds invested in emerging markets were withdrawn by the investors and there was a volatility in the emerging financial markets after the announcement. This has affected the global financial markets.

While announcing Q3 , the government mentioned that the withdrawal would depend on two factors that is unemployment level reaching 6.5% and inflation at 2%. The government also expected that the economic growth would be at a much higher level by adopting Q3. There is a significant movement in all these parameters towards achieving the  goals but it will take at least a year from now to reach the targets set by the Government .

There was an improvement in Trade data reported recently which is again a good movement towards achievement of set economic targets.

The adoption of indicator based approach during the economic crisis is a good method and it provides an objective basis for decision making to the authorities. Looking at these indicators, July 31^st Statement of Fed did not give any indication of any tapering by September as many of the Analysts were predicting.

Economic growth in First two quarters was  lower than expectations and the first quarter growth number was revised down to 1.8% from 2.4%. But the growth in the second of fed fiscal year is likely to pick up momentum.

Inflation in 2012 was at 2.1% and it is likely to come down to 1.6% in 2013  and it is expected to be in the range of  2.2% in the next few years.

Consumer spending rose by  3.4% in the first quarter, fixed investments by 4.1% and Residential investment by 12.1%.

All the corporates in US have a cash ( global resources )of more than $ 5 trn and non financial companies have a cash of more than $ 2 trn. They have started investing in Capex and many companies having high cash reserves will declare high dividends. This will increase the dividend yield for many companies.

The corporate sector performance in Q2 is likely to be better but as per analyst estimates , US has one of the high P/e ratios in the history. The banks had reported very good performance in Q2.

The government is able to move toward its target of sequestration and the budget deficit is likely to be down to 2% by 2017.

2.2 mn new jobs were created in 2012 and 6.3 mn since the employment level bottomed out. Wages are still growing.

Household debt to disposable income fell from 126% before recession to 104% by the first quarter.  There is a favourable trend showing a movement towards 90 – 95% under normal circumstances. Housing starts in first quarter was 968,000 annualised in Q1, 35% higher than the previous year.

Net wealth of US household sector has increased by nearly $ 15trn over the past three years.

US is not facing a short term fiscal deficit problem.

Recovery today does not look secure to withdraw the monetary stimulus immediately and it is likely to happen by July 2014 as per the above point.

In the past six months, congress made adjustments to both spending side and taxes and the deficit is likely to come down to reasonable levels.

At the end of 2012, Bush era income tax cuts were made permanent for low and middle income wage earners. Taxes rose for wealthier Americans. Wealthy will pay higher dividend, capital gains and estate taxes.

On the spending side $ 2.1 trn was identified. $ 900 bn of back loaded costs have already been settled and underway. Other $ 1.2 trn “sequester” focuses heavily on cuts to defence and other discretionary items. Despite there are concerns that this may not happen, there is a high likelihood that this would be implemented.

The government is taking special management steps to stretch its resources for several more months, putting off the real debt ceiling deadline until October.

Immigration reform would enable 12 million undocumented immigrants , to fill the job openings . This will create income opportunities for these immigrants thereby creating additional national income and consumer demand.

This reform would help the new manufacturing strategy of US which is based on low price for shale gas in US. Using the availability of this gas, the government has decided to revive the manufacturing sector and many of the imported items from countries like china will be produced in US going forward. The imports will go down and the trade deficit will be down.

S& P price gains seven months in a row up 15.4% between Nov 12 – May 13. Earnings are likely to beat forecasts.

YTD returns from S&P was at 12.6% by the end of June. MSCI emer markets had shown a negative return of 10.9% and 10 year treasury yield was up by 41.5%. The UBS commodity index was down by 10.5%.

Looking at the globe, Europe continues to be under economic pressure and the solutions are still not in immediate site and in Middle east, the political tensions are a great threat. Among BRIC , China is doing better but its performance levels were down compared to the peak and there is a pressure on exports. Considering all the above and the US increasing self dependence and better management of the economy supported by improving corporate performance and increasing household wealth, US is becoming attractive for investments.

The uncertainty prevails on when the Economic Stimulus would be withdrawn and the feeling is that the process would start soon from the month of September. From the present indications it would take a few more months to achieve the stability expected by the US government. The government’s approach to adoption of indicator based approach for action plans  should be intact.  There could be a clear  communication from the authorities that the stimulus withdrawal will be based on achievement of defined targets on Unemployment and inflation.

Whatever is said and done, one day the stimulus withdrawal has to start and the withdrawal could be made smooth by gradual withdrawal over a period of time. From the present indications, the whole process should take at least 2 to 3 years and the withdrawal could start with gradual reduction of purchase of bonds. To start with, reduce the purchase size by $ 2 bn a month and a maximum increment withdrawal in a month could be $ 5bn.  When the bond purchase programme achieves the level of $ 40 bn a month, then the Fed could look at increase in the interest rates in phases. The incremental increase in every instance could be 10 bps. The interest rates could be gradually increased. The programme for withdrawal could be drawn up looking at various scenarios and how it will affect the bond portfolio of banks and how it will affect the international financial system. The plan drawn up could be made less painful for those segments which are going to be affected due to withdrawal. From the present indicators, it appears that the first phase of withdrawal could be started in the month of March 2014 and the phased programme could be implemented.

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