Global Optimism on India's mandate for Change. Agenda for New ruler, Thorns should become Roses

 

The Indian Equity markets are trading at close to record highs, while the Indian Rupee (INR) has staged a dramatic recovery in the last few months with the arrival of Dr Raghuram Rajan as the Governor of the Central Bank, which the markets has taken as a positive move by the government towards recovery agenda. 

 

FII’s have been net buyers of bonds for USD 5.9 billion in the first three months of calendar year 2014 while their equity purchases have been USD 2.6 billion.

There has been largely positive data’s over the last three months:

• The government had cut its borrowing by Rs 150 billion in the current fiscal
• The government is running a large cash surplus with the RBI that provides a cushion for next year’s borrowing.
• The government has even bought back Rs 150 billion of bonds from the market to reduce cash surplus and increase liquidity in the system.
• Inflation has come off sharply over the last four months with the CPI (Consumer Price Index) inflation coming off from 11.24% to 8.10% and WPI (Wholesale Price Index) inflation coming off from 7.52% to 4.68%.
• Bank deposit growth at 15.5% year on year as of March 2014 is up from levels of 13% seen eight months back.
• The system has seen strong inflows from the FCNR B deposit swap window of the RBI with inflows of USD 34 billion in the September – November 2013 period.

The equity and currency markets are factoring in a Modi led NDA government at the center and are rallying on expectations of the new government pushing reforms and economic growth. 

 

Few months back Dr Raghuram Rajan Central Bank Governor took the United States Federal Reserve to task for failing to recognize the negative consequences to emerging markets from its tapering program, saying international monetary co-operation was breaking down.

He also warned recently against allowing a world order to emerge in which “everybody is in their own boat and they sink or swim. We’re in it together”

The optimism is slowly limping back with some strong fiscal and monetary measures and the data’s are showing signs of response from the economic system. In fact India seems to be less vulnerable to fed’s tapering program which by itself has given the markets the necessary booster for better valuations. 
 
The next cycle of growth may not be necessarily through globalization as there is a distinct change in the way the larger economies are playing out on their own growth strategy.

• US is focusing on recovery through higher focus on manufacturing on the back of energy revolution and re-shoring of manufacturing from China
  
• China has shifted their policy towards domestic consumption model to bring back the falling growth.
  

India with the arrival of new government (hopefully a stable one) should look into itself for the recovery and move back to 7% above growth in the next few years. The previous cycle which had an unprecedented growth of over 9% was on account of huge flow of capital from the west and thus sans sustainability with the exit of money on account of global crisis. 
 
With US focusing on repairing their fiscal there will be restricted money flow and hence the new government has to frame policies which can support capital formation from inside to support sustainable growth. 
 
A vibrant debt market and deep penetration of money market will help in capital formation which is extremely essential for funding of infrastructure which is critical for the growth prospects of the country.

Self sufficiency on capital formation will reduce the risk of global shocks and still achieve reasonable level of growth by delivering job creation and better quality of life. 
 
SME’s are extremely important contributors to growth and employment. Sustained growth of over 7% can be achieved only if SME’s get access to cheaper credit, better technology and human capital. 
 
We must work harder on our human capital. We’ve got fantastic doctors and engineers and so on, but we need the mass [of people] to be better trained, better electricians, plumbers, factory workers, and those combined with the factories that are set up in this new infrastructure environment will be very helpful.

Technology can also be used to facilitate credit. 
 
MSMEs get squeezed all the time due to lack of support from Banking system as well as delayed recoveries of receivables from large buyers. Setting up a Trade-receivables Exchange, which the RBI has been discussing with market participants can be a big game changer with better accessibility to resources in the market place for SME's. Once again, the key is to reduce transaction costs by automating almost every aspect of the transaction so that even the smallest MSMEs can benefit.

One of the difficulties the poor and small businesses have in accessing credit is the lack of information about them. If savings and payments products are sold widely, and information, including payments to mobile companies, utility companies, as well as the government, collected, then the excluded can build both positive and negative information records that will help them access credit. This, in turn, can improve the willingness of banks to lend.

While skill development at human capital level is imperative to meet out the demands of youthful demography, knowledge development at institutional level will be extremely crucial for sustenance, in an era of uncertainties, shorter economic cycles and unpredictability of global factors which influence local behavior. 
 
The new government will not only have the challenge of bringing radical reforms to help Jump Start the weakly placed economy, but also will have to work on a narrow time space, since the country cannot afford to continue at a lower growth rate too long

The so called demographic advantage can turn into a liability through raising unemployment if we doesn't make a smart recovery within effective time space. 
 
In the next few months we would welcome a new ruler who should have answers for Infrastructure, Technology, Skill development at breath taking pace for the country to make U turn for recovery and register inclusive growth.