Sensex can even fall to lower than pre-Modi levels
Though the Sensex had a relief rally of 291 points taking it to 24,480 on Tuesday, the fact that it is below the level it was when Narendra Modi assumed office—it was 24,121 on May 16 when the BJP swept to power and 24,716 on May 26 when Modi was sworn in—has to be quite sobering. And more so since during this period, there has been a dramatic fall in oil prices that have both kept India’s fiscal and current account deficits in check and, along with other commodity prices, played a big role in keeping inflation in check—the three biggest Modi achievements in the last year. Oil prices which were around $110 a barrel when Modi swept to power are at around a fourth today at $30. In the four quarters to October 2014, as JP Morgan’s India chief economist Sajjid Chinoy points out, India’s net oil imports averaged 5.3% of GDP versus around 3.2% in the four quarters since—around half that windfall went straight away to the government by way of extra taxes and lower petroleum subsidies and the rest made its way into the economy by way of consumer demand. Had oil not collapsed, it is clear India’s much-vaunted strong fundamentals—including GDP—would have looked very different.
The flipside is that the global economy is much weaker since Modi took charge. Global growth is down from 3.4% in 2014 to 3.1% in 2015 and trade growth from 3.4% to 2.6%, and though the IMF’s latest projection for global growth in 2016 is a slightly higher 3.4%, this is 0.2% lower than the projections made just three months ago. While the US growth is projected to be slightly higher at 2.6% in 2016 versus 2.5% in 2015, the biggest worry is China’s 6.3% in 2016 versus 6.9% in 2015 —with $600 billion flowing out of China in just the last six months, and debt-to-GDP rising 80 percentage points since 2008 to 300% in 2013, Morgan Stanley’s Ruchir Sharma has been convinced the country is on the verge of a recession. Continuously falling oil prices may be good news for a net oil-importer like India, but have larger implications in terms of not just India’s exports, but also in terms of FII flows as well as remittances from the oil-rich Gulf region—the negative FII sentiment will be reinforced by rate hikes in the US by the Fed.
In such a situation, there is a clear ceiling to India’s growth, and this has been worsened by the collapse in overall investment levels—gross fixed capital formation was down to 29.9% in H1FY16 as compared to 30.3% in H1FY15 and 34.9% in FY09. Even stalled projects that were reportedly getting cleared at breakneck speed in the last year of the previous government and in the first year of this one, appear to be growing. According to CMIE data, stalled projects have risen from R9.4 lakh crore in June 2014 to R10.7 lakh crore in December 2015 while new project announcements have fallen from R4.1 lakh crore in December 2014 toR1 lakh crore in December 2015. Fixing this isn’t going to be easy for anyone, including Modi since, apart from the poor demand scenario, there can be little progress till there is a big shakeout of India’s heavily indebted companies—that will have to await both the bankruptcy bill and the will on the part of government to see really big promoters being eased out. Even with the best of intentions—and firms in telecom and oil/gas, for instance, will question this due to unfavourable government policy—getting India back on track will take a few years.
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