The arrival of annual monsoon in the subcontinent ahead of time and the strong possibility of the central bank toning down its hawkish stance should provide further impetus to the bullish fervour sweeping Indian stock markets, which have scaled record highs for weeks together riding a wave of optimism on growth prospects.
A slew of reform measures undertaken by Prime Minister Prime Minister Narendra Modi’s administration, which completed three years in May of its five-year term, including the impending roll out of a Goods and Services Tax (GST) from July, moves to address the bad debt problem weighing down banks and an iron hand against tax dodgers are seen as setting the stage for Asia’s third-largest economy to expand at its full potential.
Many of these policy initiatives will cause disruptions at the start and dent growth, but should give handsome dividends in the years ahead.
“The long-term benefits will include higher productivity growth due to efficiency gains in business operations, greater investment as interstate tax barriers are reduced, enhanced tax compliance and an expanded revenue base,” Moody’s Investor Service said in a report on India.
The stocks rally to all-time highs on Friday is a resounding vote of investor confidence on the outlook, shrugging off data released two days earlier that showed GDP growth in the March quarter plummeted to its lowest in more than two years.
“In a macro perspective, India is in a very sweet spot,” Keki Mistry, CEO of HDFC, told ET Now television channel, adding that the drop in March quarter GDP was a blip.
India’s $2 trillion (Dh7.34 trillion) economy expanded just 6.1 per cent in January-March, a full percentage below market expectations, as last November’s abrupt government decision to remove high-value bank notes that comprised 86 per cent of the currency in circulation — ostensibly to ferret out unaccounted cash and halt terror funding — slowed economic activity.
The slowdown knocked India off the top position in the global sweepstakes for economic growth, below China’s 6.9 per cent for the same period.
Rebound seen
A top policy adviser to the government said growth would rebound in April-June thanks to an improvement in cash supply and economic activity, and help India regain its fastest expanding tag.
“We are pretty much out of the woods as far as demonetisation is concerned,” Arvind Panagariya, vice-chairman of Niti Aayog, told a news conference. “We should see a good turnaround in the first quarter.”
Others too believe the impact of the currency removal is behind us.
“Looking ahead, there is reason to be optimistic, as some of the problems on account of demonetisation have faded following the introduction of new currency,” the Times of India, the country’s biggest circulated daily, wrote in an editorial.
Panagariya, a former Columbia University economics professor, said growth in the current financial year to next March would accelerate to 7.5 per cent and top 8 per cent in 2018-19. The economy expanded 7.1 per cent in 2016-17.
“We also expect growth to remain supported due to expectations of firmer consumption and exports,” Shashank Mendiratta, economist at Australia & New Zealand Banking Group, said in a note. The bank predicts India’s economy to expand 7.5 per cent in 2017-18.
“Before the present term of the government ends, I would expect that we would hit the 8 per cent mark and probably enter another trajectory of sustained growth at 8 per cent plus,” Panagariya said.
Eyes on RBI
However, there are fault lines that must not be ignored. Heavy government budgetary allocations for infrastructure and consumer spending have been the twin engines driving the country’s economy. Private-sector investment, a crucial cog in the wheel of job creation and sustainable economic expansion, has remained muted.
“The Indian economy is suffering a growth and investment slowdown which cannot be wished away,” the Indian Express said in an editorial. “Without investment reviving, there can be no jobs and incomes to sustain spending.”
Capital investments fell an annual 2.1 per cent in the March quarter. While the many policy moves initiated by the government would lift expansion over the longer term, there is nothing to address some of the short-term problems. Consumer price inflation fell below 3 per cent in April, and the forecast for normal rainfall in the June-September season should keep a lid on price pressures.
It is against this scenario the Reserve Bank of India (RBI) meets on Wednesday, and the consensus among economists and market pundits is for the central bank to hold its repo rate at 6.25 per cent and water down its stance on monetary policy.
“With inflation under control and manufacturing growth below par, we may see the RBI changing neutral monetary policy stance to accommodative in coming months in order to support the economy,” said Pollyanna de Lima, economist at IHS Markit, whose survey showed factory activity cooled in May.
The central bank has often belied market expectations and it is not clear which way the decision would go. Batting for a loose policy, the Indian Express said: “Monetary stimulus via a 50 basis points cut in interest rates by the RBI, when inflation is truly under control, will certainly help now.”
Auto sales, indices
The top-30 Sensex hit an all-time high of 31,332.56 on Friday before closing at 31,273.29, up 0.8 per cent for the week. The 50-share Nifty gained 0.6 per cent as it climbed to its highest close of 9,653.50.
Motorcycle makers TVS Motor Company and Hero MotoCorp were in top gear after their May sales jumped 16 per cent and 8.7 per cent respectively over the same month a year earlier. Shares in TVS Motor hit a record Rs565 and closed at Rs541.55, stretching gains in 2017 to 50.2 per cent. Hero MotoCorp raced to Rs3,850 and ended at Rs3,841.75, up 26.2 per cent this year.
Rival Bajaj Auto dropped after its May sales fell 10 per cent.
Total vehicle sales at Maruti Suzuki, the country’s leading car maker, grew 11.3 per cent in May, but its exports slumped 36.3 per cent. Tata Motors said its car sales climbed 27 per cent, helped by new launches like Tiago, Tigor and Hexa, but commercial vehicle sales fell 13 per cent. Utility vehicle and tractor maker Mahindra & Mahindra’s sales rose three per cent.
The writer is a journalist based in India