Recovery remains nebulous despite the exceptional terms of trade gains and other positives
The year 2015 may yet go down in Indian economic history for the exceptional fall in the price of oil, a largesse that enveloped the entire year and inspired much optimism throughout. In a stroke, this corrected India’s external imbalances, sharply brought down inflation, improved public finances and added another growth driver—increased consumer spending—to existing ones like higher public capital expenditure and structural reforms.
The second major positive that defines 2015 is the turn in monetary policy. In tight mode from 2010, and exceptionally restrictive since late-2013, many regarded high interest rates as a major constraint to investment and growth recovery. Like oil prices, monetary policy too began to relax at the beginning of the year, was pursued throughout, cumulating to 125bps in all. It is hard to be as unequivocal about fiscal policy: Sticking to a committed consolidation path, quality improvements and consumption-enhancing salary revisions are likely a plus for investors, rating agencies and civil servants; others may grumble about higher taxes and cesses that equally marked the year.
The third major highlight of 2015—we don’t quite know if this is a positive or a negative—is the enigma about growth, which also arrived in January. A rebased national accounts series marked up the 5% growth in FY14 to 6.9%. Advance GDP estimates for FY15 followed in February, indicating growth would accelerate further to 7.4%. While these robust numbers provoked much confusion, even disbelief, the spin-offs have been distinctly upbeat. India was straightaway propelled into the fast-growers’ league and emerged as the world’s fastest-growing nation, no doubt helped generously by China, which decided, around the same time, to slow down.
Foreign capital surged in as GDP growth—7% or 5%-plus, depending upon the metric you like—pulled in investors shunning Brazil, Russia and other oil-commodity exporters. The rupee fared well too, holding strongly above the waters even as most emerging market currencies submerged in a global tide of depreciations.
A series of fortunate events, as it were. A platter that could possibly overwhelm the minuses, of which there were several. By a quirk of circumstances, 2015 is also marked by disturbing developments of possibly unprecedented magnitudes. At the top of this pile are high levels of corporate debt and an unending stream of NPAs weighing down the banks. Both continue to hold back investment and lending, pointing to long haul of repair ahead. Another unfortunate constellation is a second successive monsoon failure, weakened international agriculture prices and minimal increases in farm support prices. The phrase ‘rural distress’ entered the lexicon of economic discourse and dented the sales of many industries that had come to rely upon robust rural demand.
Many indicators touched new lows and were at variance with the buoyant growth numbers. In this basket fall the year-long contraction in exports, the highest levels of idle factory capacity in five years, the feeblest growth in bank credit in more than a decade, a constant decline in corporate earnings and sales each quarter, an industrial output uplift that more disappointed than inspired, the failure of private investment to take off as anticipated and much else. An exceptional configuration, leading to caustic commentary like ‘it doesn’t feel like 7%-growth’ or ‘feels more like 5%’! Therein lies the growth enigma.
Externally, the downgrading of world growth and trade projections in succession through the year constituted one of the weakest demand environments since 2008. Then, shockwaves from China’s slowdown, the related slowing of many EMEs, US monetary tightening and divergent monetary policies of the advanced countries are some critical factors that increased uncertainty.
Weighing the developments in balance, an obvious question is why most indicators worsened, or improved so little (e.g. industrial production) despite the astonishing size of several positive impulses. Why have growth forecasts resting upon this bounty eventually been scaled down? Why did private investment not take-off as anticipated? Why did the drivers underpinning growth projections at the start of 2015 fall by the wayside, one by one, leaving anxiety even about the sustainability of a consumption revival in the end? Do then the negatives have the power to potentially overwhelm the positives? As 2015 draws to a close, the puzzle is why a recovery remains nebulous despite the exceptional terms of trade gains and other positives. Perhaps 2016 may offer new information and insights.
RENU Kohli is Delhi-based Macroeconomist