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Is the Indian economy on way to recovery?

While the Indian economy may not be out of the woods yet, encouragingly, sentiment seems to have turned positive over the last couple of weeks for various reasons.  

twitter-logo Shweta Punj        Last Updated: October 2, 2013  | 12:40 IST
Is the Indian economy on way to recovery?

One cannot discount the power of sentiment and perception in reviving interest in the India growth story. So, while the Indian economy may not be out of the woods yet, encouragingly, sentiment seems to have turned positive over the last couple of weeks for various reasons.  

Consider this. We have finally seen a pick-up in key economic data. After declining for four months in a row, India's engineering exports turned positive in August and registered a marginal growth of 2.2 per cent compared with the year-ago period. Industrial output also turned around in July and recorded its first expansion -- 2.6 per cent -- in three months. Then, we got a new Reserve Bank of India Governor. Finally, Narendra Modi, widely considered as business-friendly, was declared the Prime Ministerial candidate of the main opposition, Bharatiya Janata Party.

It's an interesting coincidence that all these developments, thought not quite inter-related, happened in quick succession. A $50 billion bilateral currency swap agreement with Japan and setting up of a $100 billion fund by BRICS (Brazil, Russia, India, China and South Africa) nations to steady currency markets have further shored up sentiment.

Economists and the industry are hoping that the feel good factor would sustain. When P. Chidambaram took over as finance minister from Pranab Mukherjee last year and immediately announced a slew of reforms  -- often referred to as 'reforms 2.0' - there was a similar change in mood, they point out, but it did not last long.

Raghuram Rajan , too, began with a bang. On day one as the Governor of the Reserve Bank of India he dismantled some capital controls and sent out the right signals.

"Perception is important, and Rajan managed that very well on the first day of the job," says Rajya Vardhan Kanoria, Chairman and Managing Director, Kanoria Chemicals and Industries. Kanoria himself is investing $30 mn in setting up a textile plant in Ethiopia. "Ethiopia is bureaucratic, time consuming but it is systematic and clean," he adds. Not something one would say about doing business in India.

The United Progressive Alliance (UPA) government too has signalled its means business. The Cabinet Committee on Investments has cleared several projects even as Parliament has given its approval to the Land Acquisition Bill and the Pension Bill that aims to create a regulator for the sector. But will the UPA be able to maintain the momentum this round?

Vinayak Chatterjee, Chairman and Managing Director of Feedback Infra, an infrastructure services company, expects construction projects worth Rs 150,000 crore to take off between now and the summer of 2014. "There is energetic action on the policy front and Raghuram Rajan will take a pragmatic long term view," he says.

Also, the industry and investors will closely follow the developments at the US Federal Open Market Committee meet slated for Wednesday. Analysts are hoping that the reversal of the quantitative easing (QE) would be carried out in tranches - a significant quantum will lead to currency volatility and financing the current account deficit could become difficult. Standard Chartered estimates that the US Federal Reserve could taper QE by $10 billion a month.

Latest data show the current account deficit (CAD) at $21.8 billion for the April-June quarter of 2013/14, or 4.9 per cent of gross domestic product, up from four per cent in the corresponding quarter of 2012/13. But almost all projections suggest that the aggressive curbs that have been imposed on gold imports will bring the CAD under control in days to come. Bank of America Merill Lynch lowered its CAD target for India for the current fiscal year to 3.2 per cent of the GDP from four per cent earlier.

Crisil has also said that CAD will improve in coming quarters driven by the curbs on gold imports and a weak rupee benefiting from exports. Economic Affairs Secretary, Arvind Mayaram said: "It is estimated that gold imports could be restricted to about 800 tonnes and substantial gains will accrue in the next nine months.".

India's battle against the rising twin deficits - fiscal and current account-had seemed almost lost at one stage. This had also taken a toll on the exchange value of the currency. But there seems to be respite in sight. Gross tax collections up to August grew at 8.7 per cent and preliminary numbers for September showed further improvement. In any case, the bulk of revenue collections come in during the second half of the financial year.

The government's reiteration of the fiscal deficit and CAD estimates for the current year and the revision of CAD projections by the brokerage houses suggests that the tide for the economy could be turning.

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