Are there hopes for a revival in the Indian economy?

Bloomberg Businessweek reported on November 25, 2013 that a recent poll conducted on a median estimate of 25 economists indicated that India’s economic growth for the fourth quarter is expected to turn in another sub-par 5.0 percent growth rate. This relatively bleak number will likely turn out to be the longest stretch of slow economic growth numbers shown in the data going back to 2005, as Prime Minister Manmohan Singh and his Congress Party members continue to find themselves struggling to manage India’s various economic woes. The Indian Parliament is still mired with controversial issues including corruption among members within the ruling party, crime prevention measures, especially when tackling issues involving sexual violence against females, strict foreign investment ownership rules which prevented foreign investors to enter into the markets, among many others. The country is scheduled to hold parliamentary elections by May 2014, and it is expected that the ruling Congress Party might suffer its worst defeat at the polls.

The Nov. 25 article reported that the median estimates for India’s gross domestic product (GDP) will probably rise to 4.6 percent during the third quarter ending September 2013, compared to 4.4 percent in the prior quarter. The economic growth numbers are scheduled to be released on November 29, 2013. Separately, Thomson Reuters News reported on November 27, 2013 that the Indian rupee (INR) currency rose to a one-week high and ended at a session high of 62.14-15 to the US Dollar, one of the strongest showings since November 19, 2013. The November 26, 2013 session’s rate was traded at INR 62.50-51 to the US Dollar (USD). This comes after the Reserve Bank of India (RBI) deputy governor, Mr. H.R. Khan was quoted by Reuters and other news wires that the concessional swap windows have attracted approximately USD 25.0 billion. The new swap facility was introduced early in September 2013 to bolster the central bank’s foreign exchange reserves, providing the necessary firepower needed to cope with potential liquidity crunches and sharp drops in the Indian Rupee currency.

With the expected slow economic growth projections, several fund managers have turned increasingly negative over India’s economic fundamentals going forward. Most of these fund managers have pared back their portfolio holdings of Indian equities, bonds, currencies, and other financial instruments in anticipation of more weakness in the overall economic fundamentals, and outlook. The fiscal reforms are not seen as terrific among many investors, and have not provided much comfort among them. Most of the fund managers have turned to other markets in Asia, most notably Japan, Thailand, South Korea, China, among many other Asian nations for relatively good and possibly stable returns. The South Asia region continues to be laggard when it comes to economic, and market competitiveness. However, there are still some sovereign wealth funds including Singapore’s Government Investment Corporation (GIC), and corporations like Singapore Airlines (SIA), which have made big inroads in terms of the amount of foreign investments poured in, including the setting up and building of industrial parks in the coastal regions, and SIA got the Indian government’s approval in signing off a joint venture agreement with the Tata Group to operate a domestic airline, but beyond these areas, infrastructure projects including roads, rail links, bridges are still relying heavily on both the federal and state governments to finance these large scale, capital and labour intensive industries.

The government red tape bureaucracy continues to pose a barrier of entry. These include the continuing stringent foreign investment ownership laws which have kept many investors from abroad out of the Indian markets when it comes to resolving issues that are facing severe infrastructure shortfalls including the current state of disrepair among the country’s roads, bridges, rail links, and other transportation modes. The country’s Finance Minister, Mr. Palaniappan Chidambaram has recently repeated his call that the government will abide strictly to the deficit targets, and will reduce the size of spending programmes including urgent need to fix up the transportation infrastructure, and financing welfare programmes by approximately 700 billion Indian Rupees (USD 11.0 million) during this fiscal year. Minister Chidambaram has earlier pledged that the government will narrow the fiscal deficit to a six-year low of 4.8 percent to the GDP in the twelve months beginning April 01, 2013. The cutback in government spending programmes could be an indication that the government funding has been largely exhausted as a result of the over reliance and burden that the administration needs to take on in order to ensure that the economy continues to function properly.

On the monetary policy front, there have been major reforms being carried out by the newly appointed Reserve Bank of India (RBI) Governor, Raghuram Rajan, including the various policies implemented which are intended to allow more foreign participation in the financial services sector, and bringing down inflation levels through various rounds of inflation hikes. The official interest rate currently stands at 7.75 percent since October 25, 2013 when Governor Rajan and his RBI colleagues have reached an unanimous decision to raise the interest rate levels in order to fend off the increase in capital outflows, causing the Indian Rupee currency to fall to its lowest. The Indian Rupee currency fell to levels at approximately INR 57.00 to INR 58.00 to the US Dollar in late September 2013, before strengthening back to the current INR 60.00 levels to the US Dollar, which is quite encouraging during the short span of Governor Rajan’s term at the RBI. The Mumbai Sensex Index has also recovered from its major lows in September to the present range of 20,555.00 to 20.562.0 from the last low at 19,380 at the close of trading hours on September 30, 2013. The Sensex Index has risen to 5.1 percent during 2013, and is valued at 13.4 times historical price-to-earnings (P/E) multiple. This is quite a comeback, considering that economic growth is still relatively weak, and foreign direct investment (FDI) are just starting to trickle in, in view of the potential risks that could cause a major setback to the economy.

Overall, the general view appears to be signalling that the Indian economy might still be weak, and a massive economic transformation is much needed amid the slowing growth, and lack of competitiveness when compared to other major Asian countries, including China. Poverty levels continue to be rampant, and several Indians, including the young and vulnerable ones are increasingly suffering from malnutrition. There is a need to have this economic transformation plan to be comprehensive and there should also be consistency among the implementation of the various fiscal and monetary reforms that are badly needed to kickstart the economy. The May 2014 parliamentary elections could be a major game changer for Prime Minister Singh. There is a growing urgency to fix the economy as soon as the new administration is being elected to oversee the running of the country’s future.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc