High on intent, but path ahead is steep up-hill
Narendra Modi and his team in the Government are indeed on over-drive mode to script turnaround in economic stability, which would lead to inclusive social prosperity. The first task of establishing clean (and efficient) Government and shake-up of executive (and administrative) machinery is seen to be done. Modi has established good "connect" with State Governments (and like-minded opposition political parties) to solicit their support in his initiatives, and also attracted overseas stakeholders to support (and participate) in the Indian long term economic growth agenda, through investment and consumption (of India goods and services to build exports). The strategy to build economic scale through large scale capital infusion for infrastructure, and to upscale growth in agriculture and manufacturing sectors are obvious steps in the right direction. All-out efforts to eradicate black money (and below the line economic activities) to cut revenue pilferage are measures not thought of before, which would plug leakages for better efficiency. The financial inclusion agenda to establish last-mile connect with the rural poor is laudable action, despite being done after 68 years into Independence. All these have generated internal confidence and external interests on India, making India look different to what it was a year before! Thus far, it is great start to make the World turn into India!
The hurdles ahead for Modi are many and tough, not to mention of the political resistance that the Government is facing to make things put to effective work. It is not surprise, given the hard fact that it would take years to have NDA majority in the Rajya Sabha. Opposition political parties not in support to sensitive (and crucial) measures for India development is the disguise of the Indian democracy. Let me not get into this, accepting the reality that political maturity (post electoral mandate) for common cause of "people welfare" is yet to evolve, taking lessons from the West and developed countries. The critical issues are related to capacity building to expand consumption, and to attract fresh capital to set pace for the growth engine.
Domestic woes continue to stay irritant to slow down the pace of execution of intent
The financial system, which need to supply fuel to the growth engine is in disorder; systemic important PSU banks are struggling for capital against NPA woes and earnings pressure. While domestic investment appetite is low, lenders continue to stay in risk-off (and aversion) mode. While balance sheet liquidity is available in plenty (with huge amount of investments in risk-off Gilts and AAA borrowers), opportunities are few as of now. It is positive that foreign investor appetite is in plenty. India is in their investment radar, which was not there a year ago! The Government need to think out of the box to provide relief to the existing unproductive credit stock, and create incremental capacity to pull fresh investment. The role of the Government through public sector investment (and financial intermediation) entities will be critical, to create private and foreign investor participation.
Macroeconomic fundamentals have turned the corner, and the worst is behind. But the best is not yet at sight. Given the investment - capacity creation - consumption conflicts in play, FY16 GDP growth may fall short of 8.0-8.5% target with most expectations around 7.5-7.8%. While inflation fears are behind (CPI inflation down from over 10% to below 5%), the short term outlook is not good with downside risks into higher end of 4-6% tolerance zone. This would mean that monetary policy support from here on will be tough to come by! It is fortunate that twin-deficits are no more threat to growth. FY16 fiscal deficit will exceed set target of 3.9%, while CAD is expected to be in comfort zone at 1-2% of GDP.
All combined, risks to NaMo economic upliftment agenda are from (a) clean-up of financial intermediation engine to support leverage of equity (b) revive domestic investor appetite from risk-aversion to risk-support (c) open up incremental opportunities to attract fresh investments from foreign investors (d) divert public monies from risk-off investments to risk-on growth supportive credit (e) fall-back supply side measures to arrest inflationary pressures from global cues and from acts beyond control (f) expansion of economic capacity through aggressive measures around infrastructure, manufacturing and agriculture sectors (g) diversify capacity expansion taking the opportunities to where lower end of the pyramid reside for geographical expansion of the economy and (h) top-up financial inclusion agenda with economic, monetary and technology inclusion for permanent relief.
Political maturity is the catalyst for quick turnaround
India success story can't be executed by the Government alone. It would need the support of all stakeholders. The script is written well and the execution engine is ready to pick up speed. All it would need now is the collective participation of all political parties to stay catalyst to the process, and not being irritant to slow down the pace. The present political thought process of the opposition parties should change from "you win - I lose" to "we win - people gain"! This change of mind-set will make India the best place to do business.
Good luck, Mr. Modi. ..hope for the best!
Moses Harding
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