Optimism is in the air that a stable government at the Centre and faster reforms could put the economy back on growth tracks. However, financial stability reports from IMF and RBI project a different picture. While IMF has warned in its October report the risks to EMEs will rise as the Fed starts tapering its bond purchases, RBI too warned of rising risks of a higher inflation, pressure on the fisc and stretched corporate balance sheets.
India Inc is reeling under high debt, slowing sales and profit growth as the economy slowed sharply from 9.3% in FY11 to 5% in FY13. Banks, too, are under stress as write-offs for bad debts are eroding profits. The main stress point is the infrastructure sector, which has not just locked up investment worth trillions of rupees but also poses a major risk for banks the longer the projects are delayed.
In its report, RBI projected three scenarios and the economic implications and risks. In the baseline scenario, the GDP growth is expected to climb from 5% in FY14 to 5.8% in FY15 while WPI inflation is likely to ease from 6.5% to 6% and fiscal deficit would be reduced by a tad from 4.8% of GDP to 4.7%. The medium stress scenario projects GDP growth at 3.6% in each of FY14 and FY15, a higher inflation of 8.2% and 8.6% coupled with wider fiscal gaps of 5.6% and 6%, respectively. The shocker is the severe stress scenario when GDP growth may collapse to 2% and 1.5% in FY14 and FY15, respectively, with inflation at double digits and fiscal deficit overshooting the target to 6.6% in FY 14 and to 7.4% next year. While stress test results are more of a warning of a worst-case scenario that may not come true, it is worth keeping these facts in mind for the new government that will come to power this year. Till then lets wish the economy a Happy New Year.