With oil prices dropping, the stock market rising, and even the monsoons being bountiful, the economy is on the upswing. Its double digit growth now hinges on massive investment in the infrastructure sector
The good news for India, which imports an ever growing absolute of 80 per cent of its crude oil, is that Brent Crude has come down to a 13 month low. If this trend keeps up, it will have a beneficial knock-on effect on inflation due to lower petrol, diesel and other fuel prices at the retail pumps too, in addition to making it easy to take off all remaining subsidies on fuel. This is coming in place of the fear that the war with the Islamic State terror group in Iraq, was going to push up petroleum prices.
But luckily, the bulk of Iraqi oil, pipelines, and its export mechanism/ports, are all in the south of the country, which never came under threat. Also, the global oil prices never did go up to incorporate a ‘war premium’. But all in all, it proved to be a silver lining for India and China, two huge consumers of world oil.
Cairn India has incidentally just announced very promising onshore gas finds in Rajasthan which when developed will contribute its mite towards India’s energy security.
Governor Raghuram Rajan at the Reserve Bank of India, working on reorganising the central bank to make it more nimble and useful, is already buoyed by the fact that the monsoons have turned out quite well, if a little uneven in its favours .
This will, in itself, lead to lower food prices, meaning primarily vegetables, as the cereals and grain have enjoyed a bumper crop from last year. However, because of primitive handling and warehousing, there is always a lot of spoilage and wastage in the midst of poor people going hungry.
But with lower fuel prices expected to persist, the cost of transportation of foodstuffs and other goods to market will also work lower. Mr Rajan may indeed be able to start cutting interest rates soon, thereby, enthusing business and industry, and improving the investment climate.
The stock market meanwhile, is on a roll. It has received $12 billion in foreign institutional investment already this year, taking the Nifty above 7,800 and the Sensex upwards of 26,000. Much more is expected in the second half, when the pace of investment from abroad generally accelerates.
In 2012, 65 per cent of the $24 billion total came in the second half of the year, and in 2010 it was 84 per cent of $29 billion that came, all in the latter part. In addition, domestic investors have now joined the rally, inclusive of the mutual funds focussed on equity, and all sectors of the market, ranging from the micro and small, to the medium and large stock indices, are now heading upwards, broadening the base of the bull-market and increasing its stability.
A healthy stock market growth will assist the Government’s divestment programme of equity in a number of public sector units, slated to raise anywhere between Rs60,000 crore and Rs80,000 crore. Private companies also have ambitious plans to raise money from the stock market, and this looks like a very good prospect going forward, particularly with the PSU banks groaning under their burden of non-performing assets.
However, there are some lurking external threats. Governor Rajan, famous for having predicted the Wall Street collapse of 2008, three years before the event, is once again warning of an impending financial crisis in the US, brought on by excess liquidity sloshing around, paid for with trillions in borrowed money.
This, even as the US has reached the end of its stimulus programme, and might even be looking at raising interest rates in the future. Gross Domestic Product growth rates, however, in the US and Europe alike, are not encouraging as yet, and unlikely to pick up in an atmosphere of prolonged stagflation.
India, on a revival path, towards 5.5 per cent this fiscal, and more, up to eight per cent in GDP going into 2016 and 2017, is definitely going to remain attractive. China is being closely watched for signs of distress after its blistering pace of double digit growth, now slowed to around seven per cent of GDP. But, it seems to be ostensibly coping fine at these levels.
Both India and China, housing half the world’s population, and a good deal of the demand in the world, will continue to grow faster than most other countries. Of course, the Chinese economy is already several times larger than ours, and getting ready to rival that of the US. China also runs substantial and globally rare surpluses, but India has a good chance of narrowing the gap over the coming years.
Of course, India’s early revival to near double digit growth now hinges on massive investment in infrastructure, a certain vehicle for over a trillion dollars in investment. India is seeking investment from a number of countries, including Japan, China and now Singapore, into this sector and others, and there are several other countries keen to invest, particularly now that the tangle of red-tape is being cut. Some commentators think the Modi Government might have a tough time in motivating the bureaucracy, but Prime Minister Narendra Modi himself is undaunted, having cracked this particular nut in Gujarat before.
At present, the domestic signs are all good, the best amongst both the emerging markets and BRICS nations, and sure to get better as the pace of reforms picks up. The Modi Government, with its absolute majority and a business-friendly Prime Minister, inspires strong investor confidence. Other reports also forecast a revival in private equity interest in India.
The Government is also working on revamping the agricultural remuneration scenario to get away from the stranglehold and exploitation of middlemen. The contribution to GDP from the agricultural sector, now at 17 per cent, is going to be enhanced dramatically. Rates of agricultural growth nationally, currently languishing at below three per cent, need to be better. Gujarat has turned in 10 per cent agricultural sector growth year on year, and this needs to be replicated nationally, if we are to banish poverty.
A new National Common Market For Agricultural Produce with many spot markets is being created to take things forward from the present Agricultural Products Marketing Council and the Food Corporation of India. Combined with a new body, tasked to push federalism and authority to the States, things are likely to be transformed.
This new mechanism is expected to put bigger profits directly in the pockets of farmers, using strong IT inputs for real-time information flows. It will also reduce huge inefficiencies from antiquated operational methods while creating afresh modern infrastructure for materials handling, warehousing, cold chains etc.
The potential rewards of these second generation reforms, including those in defence production, insurance and construction, that are under process, will positively impact the fortunes of millions of the urban and rural poor, and become the unbeatable electoral game-changer going forward.