Indian economy is passing through a phase where there is mix of promise as well as turmoil. For readers of this column it should not be a surprise that such opposing forces are co-existing as I have discussed various aspects of it during the past. The promise lies in government at the center with a steely resolve to address structural bottlenecks facing the nation. The promise lay in the technological and entrepreneurial wave sweeping through the large and small towns of India. The promise lies in the smart diplomacy which the government is seen to be pursuing on the global front. I believe “digital India” initiative of the existing government, if executed well, can help address many of the gaps in our growth models. Imagine a mix of wireless and wired data services spanning the length and breadth of India, helping drive quality education through web based open learning platforms, where people from remotest corners of India can access the world class course content. Not only education, but also public services and citizen reach can be immensely improved through the digital Indian initiative. Imagine the boost to entrepreneurship that can occur from the e-revolution. The digital revolution can connect the producers, processors and consumer from far reaches of India, creating a national market for goods and services.
In his amazing book, Civilization, Niall Ferguson has talked about the six killer apps that help transform a society to developed one. The apps are:- 1) competition 2) the scientific revolution 3) property rights 4) modern medicine 5) the consumer society and 6) the work ethic. Out of the above six apps, a true digital revolution here help shape three of them, competition, scientific revolution and consumer society, possibly the other three can also have indirect effects. Therefore, if I have to pick one single initiative of the new central government, I will pick ‘digital India” as the one which can have the biggest impact in the new information age.
If I only talk about the promise and I do not highlight the risks, I would end up like a one-handed economist. Risks I will be touching upon is more economic and political in nature. Indian financial markets had only discounted the positives of a global deflationary cycle, through lower commodity prices, leading to lower current account headwinds, lower cost pressures and lower fiscal strain. However, there is dark underbelly of a deflationary age. I have been warning about the same and that it would have an effect with a lag, something like the 1996-2000 age. As the hard assets collapsed last year and as the government along with RBI, reined in on measures that fuel money supply, which causes inflation, slowly but surely the agents in the rural economy and in the sectors who earn their livelihood from the hard asset sectors, felt the strain. India’s decade long real estate and land boom must have had significant positive impact on rural and semi-urban population. So as these sections of the society have felt the squeeze, so have the business who services them. The numerous economic multiplier effects have slowly gone into reverse. A weak global economy is also feeding through our export sector, where exporters have complained about anemic demand. Add to this the log jam and stressed asset accumulation in the books of the financial institutions. Such a log jam has not allowed interest rate reduction to be passed through. Though I believe there is a strong case for at least a 50 bps reduction in repo rates over the short to medium term, but apart from stock and debt market exuberance, there may not be near term positive from that on the economy.
Over the past week, Indian economic data has continued to paint a picture of an economy, where disinflation and low growth co-exists. For the month of March, industrial production came in at weaker pace of barely 2.1%, with manufacturing only growing 2.2%. Weakness in the IIP corroborates the weakness in other industrial sector indicators like core sector and PMI. Indian economy has been struggling since 2011-12 and the bumpy road continues.
Trend of US exports and imports (ex-petroleum): an important gauge of US and world economy is fast weakening
Infact, during the same time, global growth too have entered a phase, which some term as a ‘secular stagnation”. The effect of a weak global economy and an overvalued Rupee is showing up in our export performance, which continues to contract. During the month of April, exports contracted by 14% and the slowdown was broad based not just in the petroleum sector. Engineering goods, the biggest contributor to exports, rose only 2.7 per cent year-on-year to USD 5.6 billion. Exports from the electronic goods segment declined 12.29 per cent to USD 4.73 billion, while plastics and linoleum product export fell 19.30 per cent to USD 0.39 billion. Gems and jewelry sector posted a negative growth and so has export of agricultural produce.
Inflation continued to cool in April, with wholesale level inflation dropping by 2.65% and retail inflation cooling towards 4.87%. With long bond yields ticking higher, disinflationary pressures persisting and economic growth stuck in long period of weak phase, case for another 50 bps of rate cut is growing. However, I am not so hopeful of the rate cuts getting transmitted down to the levels of MSMEs, or small and medium enterprises and even many of the large over-leveraged corporates. As long as the sludge of stressed asset is not cleared from the financial system, which is very much on an expansion mode, it will difficult for smooth transmission.
Over the next week, Rupee, thanks to near term pause the global bond market rout, can gain some ground against all four currencies, but the appreciation may not last for long. I see a strong technical support coming in between 62.80/63.20 levels on spot and that may attract the central bank to intervene to support Rupee’s competitiveness. Hence, importers are advised to cover exposure in the ongoing rally in the Indian Rupee.