Indian Economy: Optimism With Caution

Indian Economy: Optimism With Caution

by Harsh Vora - Apr 8, 2015 11:04 PM +05:30 IST
Indian Economy: Optimism With Caution

The government’s optimistic outlook regarding the economy is well placed. However, there is always room for caution in optimism. 

In the annual session of the Confederation of Indian Industry (CII), NITI Aayog Vice Chairman Arvind Panagariya re-established confidence in the state of the economy, saying a lot of indicators are improving despite the pessimism expressed by certain quarters of the industry. Current account deficit is down, inflation is moderate and within control, fiscal deficit is under reins and in line with the annual target, and growth is accelerating at a desired pace.

Citing these developments, Panagariya said it is only fair that we give the government more time to perform and deliver results. Several crucial bills related to mining, insurance, and coal have been passed and some more are on the anvil. Bills on Goods and Services Tax and Land Acquisition, although subject to controversies and criticisms (many of them legitimate), are expected to boost industry performance once consensus is achieved and the bills are passed.

These may be reasons enough to trust Panagariya’s optimism, except that recent reports released by some of the world’s leading providers of financial information give a rather ambiguous picture about the state of the economy.

The HSBC Manufacturing Index, compiled by Markit, rose to 52.1 in March from 51.2 in February – a number above 50 suggests expansion in manufacturing while below 50 suggests contraction. This was the 17th straight month of expansion. It bodes well not only for firms themselves, but also for the unemployed as increased demand and resulting orders may cause firms to hire more in the coming months.

On the negative side, however, Markit report notes that input costs for these firms rose at the fastest rate since August 2014; their pain, however, was mitigated because they were successfully able to pass on the increased costs to customers. This cannot happen indefinitely. Eventually, higher input costs may end up stifling manufacturing growth if consumers refuse to absorb them.

Cost inflation may explain part of the reason why the Reserve Bank of India refrained from cutting the repo rate (the policy interest rate that ultimately determines the overall rate in the economy) in its official monetary policy review on Tuesday, April 7th. A cut in interest rates could increase demand – as people and firms get access to cheaper loans – but it could also spur a further rise in prices.

Then, there is MNI’s India Business Sentiment Indicator, which is a key measure of the Indian economy’s strength and standing. In March, it fell by 4.8 per cent on account of lower output and fewer orders. Markit’s India Business Outlook, a survey conducted to gauge the thoughts of local manufacturers on the future business conditions, paints a similar picture. A recent survey conducted in February reveals softened optimism. Manufacturers expect a higher demand from consumers, stronger productivity, and increased expenses on R&D – all of which may eventually boost company earnings.

But Pollyanna De Lima, an economist at Markit, throws a word of caution. “Although surveyed companies expect improved productivity and sustained demand growth to support higher output in the year ahead,” he says, “concerns towards persistent power cuts, increased competition and a lack of skilled labour are seen as growing threats to the outlook.” At least part of this challenge can be addressed by the government taking an even firmer stand in support of infrastructure-related reforms.

Not coincidentally, in the same annual session of CII, the Minister of State for Power and Coal,  Piyush Goyal, reassured industry leaders that by 2019, India’s thermal power generation will be doubled to two trillion units and energy production from renewable sources, mainly solar, will be risen by as much as five times. Although the target looks ambitious, he also emphasized that India will not have to import coal in the next two to three years.

With positive developments in the coal sector recently, it should not be too difficult a goal for us to achieve. Eventually, however, the government must realize that State’s monopoly over the country’s resources is repressive to growth. A robust privatisation plan for Coal India, one that makes way for a truly competitive marketplace, where companies naturally attract higher investments needed for mining and exploration, should be considered for us to realize the dream of a self-sufficient nation in terms of energy requirements.

In summary, as citizens being governed by a rather big State – keeping aside all the rhetoric of a minimum government – our default response to any claim about economic prospects coming from government quarters should be that of a skeptic. We would be better off questioning these claims, studying various independent analyses, and comparing both to get a reasonably clear picture. In this particular case, however, the government’s optimism is more or less shared by various other indicators discussed above, except that the challenge of cost inflation lingers, while persistent infrastructure bottlenecks may dampen growth prospects.

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