5 good signs for Indian Economy

5 good signs for Indian Economy

Indian-Economy1

It looks like the worse is over for Indian economy. One can see the days of surging economy in near future. Economics and elections are taking the markets to a new level. Experts are commenting that it might not be a short term boom and may last for long post elections. There are five good signs that is bringing optimism in Indian markets:

Sensex breaching new highs:

A few minutes back, Sensex touched a lifetime high of 22,000 before settling at 21,919.79 on Friday with a rise of 405.92 points or 1.89 per cent. Nifty also achieved a new closing high of 6,526.65 the same day. 149 stocks touched their 52-week high on the BSE. It’s like a Euphoria at Dalal Street. Market is going berserk. Stocks are reaching their all-time high levels. A sustained mark of 24,000 can be a reality soon.

Appreciating Rupee:

After dipping to 69.225 vs Dollar, Rupee can be seen surging again where it reached its 3 month high level of 61.07. With higher net imports in our country, surge in the value of Rupee is a good sign for the industry. Though it led to 5% decline in IT shares, yet, overall industry went booming.

Return of FIIs:

Foreign institutional investors (FIIs) have pumped money back into the Indian markets. Last 15 sessions alone witnessed investments worth $1 billion in India. Sentiments towards Indian markets is improving. There is a much greater faith in the way the Indian economy is being run now as compared to many other emerging markets.

Lowering CAD:

Though our GDP growth rate is estimated at a lacklustre 4.7%, still a growth turnaround seems to be a good possibility now. Curb on gold imports and higher interest rates which has kept inflation in check have finally paid out. Pro-active measures by RBI led to a CAD of 2.3% of GDP for April-December period.

Chances of a Stable Government:

Though people’s sentiment say that the chances are bleak, opinion polls indicate that NDA is likely to get more than 200 seats in the Lok Sabha elections with UPA coming out as a distant dreamer getting only 140 seats. Analysts are predicting that a NDA-led government would turn out to be a heaven for the markets and the results are already visible at the stock market. It is possible that

India will no longer be a country of ‘Policy Paralysis’ if any party gets a clear majority.

A Bumpy Ride for FDI

A Bumpy Ride for FDI

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Indian politics and media in the latter half of 2012 put FDI in retail on center stage. The reasons were quite vivid. In a show of audacity, the United Progressive Alliance government has decided to further open up the retail trade sector to foreign investment. Foreign investors will be permitted to enter the hitherto prohibited multi-brand retail segment and hold equity of up to 51 per cent in the units established. Other sectors to open up FDI in India are Aviation, Pharmaceuticals, Insurance and Pension.

Two sides of the coin

Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock at home. Finally, despite all the opposition and without having the consensus of alliance, UPA opened up the gates for the foreign companies in a desperate attempt to save the sinking economy. This move is nothing short of a declaration that UPA would proceed with implementing its agenda of economic reform, irrespective of whether there is majority support for, let alone a consensus on, that agenda.

The claims that FDI will bring in loads of employment and solidify the looming economy are contrary to the fact that the immediate and direct effect of FDI would be a significant loss of employment in the small and unorganised retail trade which would be displaced by the big retail firms. Prices paid to and returns earned by small suppliers, especially in agriculture, would be depressed because a few oligopolistic buyers dominate the retail trade. Moreover, once the retail trade is concentrated in a few firms, retail margins would rise, with implications for prices paid by the consumer, especially in years when domestic supply falls short.

Even if the postulations made by the UPA government turn out to be true, as vivid from the fact that India’s foreign direct investment inflows grew by over 65% year-on-year to $1.94 billion in October, according to the Department of Industrial Policy and Promotion (DIPP), yet the scenario won’t turn around overnight.

Hurdles in the way

The decision of implementing the FDI has been left to the states and most of the states have already rejected the concept as whole. Due to such strong opposition, most of the organizations have decided to wait till the clouds of mystification disperse and the scenario becomes clear for investment.  Even after the state’s blessings, which is unlikely to happen in most of the cases, large retailers would need to acquire large swathes of land in prime areas, which is a monumental task. Secondly, companies like Walmart are able to reap supply-chain efficiencies in the U.S. because of a strong infrastructure. The same thing can’t be said of India. Thirdly, taking into account that Indian consumer is a very complex persona, organized retail seems to be a small fish that would neither threaten the livelihoods of “kirana” shops, as portrayed by the Opposition, nor restore the financial health of the nation, as hoped by the government.

The road for FDI turned out to be quite a rough one in India. Whether it was inside the parliament or outside it, the issue turned out to be a centre stage for all the controversies. The step to let FDI in multi-brand retail didn’t go down well with Opposition parties and erstwhile UPA ally Trinamool Congress, which decided to withdraw support from the government over the issue and others, including hike in diesel prices. The issue stalled proceedings of Parliament till the government agreed to a voting on allowing of FDI in multi-brand retail that it managed to win, thanks to the abstention of Samajwadi Party and Bahujan Samaj Party.

Just when the government thought it was done with the issue, Wal-Mart’s disclosure in the US that it spent close to $ 25 million since 2008 on its various lobbying activities, including on issues related to “Enhanced market access for Investment in India”, created furor again. The company, however, stressed that it did not pay bribes to anyone in India. It was IKEA that made news continuously in the single-brand segment. The Scandinavian retailer wanted the government to relax the clause for mandatory sourcing of 30 per cent from MSMEs. After months of dialogue, the government relented and relaxed it for single brand segment which seems to be a favor done to IKEA.

On one side exist the exaggerated claims made by the government that FDI will be beneficial for the economy as well as common man and on the other side stands the small retailer who is genuinely worried about his livelihood supported by the opposition. Now that the foreign retailer have been granted a foothold in the market, only time will tell if the arrival will kill the neighborhood kirana stores or they will co-exist.

Fiscal Deficit and FRBMA

Fiscal Deficit and FRBMA

 

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Finance Ministry is trying hard these days to curtail the Fiscal Deficit somehow which is currently as high as 5.3% of the GDP. What is this fiscal deficit? What is this buzz all about? Fiscal deficit takes place when a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings). In simple terms, it is the difference between the ever increasing expenditure and small income.One can not think of utopian economic situation in a developing country like India and to have zero fiscal deficit as it will slow down the economic growth of the nation.

Too much of economics? Let’s try to analyze things in a simpler way. Suppose you have 30,000 bucks as your monthly income and your total expenditure for a certain month is 35,000. Now you need to raise the additional money required somehow and luckily you have a very generous friend of yours who is ready to lend you the difference. So, in such a case 5,000 will be your fiscal deficit. Doesn’t seem to be much of a problem right? The real lies problem lies with how you are going to spend that 5,000. It won’t be much of a problem if you want to buy a camera or invest the money once only but it can create a huge trouble if the expenditure is recurring one let’s say treating your girlfriend.

The next month, supposing your income remains flat and you are not able to meet your ends once again, you again approach one friend or the other and someone comes up to the rescue and provides you money without asking for the principal amount immediately and just demands the interest. You were already in need of more money and adding to your worries are now the interest liabilities. The problems get compounded. You now start curtailing on the capital part and your new loans are just for running the system. A scenario is reached when the interest payment by you requires loans from him. And this is the situation when your are doomed and things have got really messed up.

This is exactly the current situation of India. For benefit of the people and sometimes just to fulfil the political motives, government has been giving subsidies on oil even to the rich people driving SUVs more than it can sustain and to add to the problem are various bills passed just with the motive of staying in power. As a result we have a huge fiscal deficit piling up in front of us and we don’t have enough money to run the existing system. Hence, government keeps on borrowing money to pay the interests only. Unlike an individual who may or may not get loan from his friend, there are many agencies who are bound to lend money to the government, be it RBI or any other bank.

Suppose you are in a similar kind of situation. All you wish for is you had a ‘money tree’ or a currency printing machine with you. The government is one step ahead of you as it has control over the currency flow in the country, though indirectly. Consider this, if the government prints currency rampantly but the production is constant, it will lead to increased inflation as more money in the economy chases the same amount of goods. Curtailing the fiscal deficit by printing money can have damaging effects and can burst the whole economy. A classic example in this context is of Zimbabwe which had inflation rate of 300,000% at one time.

FRBMA

After the enactment of liberalization policy, billions of liabilities were being added every year. A major part of the revenue collection through tax went alone to interest payments. In the light of need of change, government introduced the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003. The main purpose was to eliminate revenue deficit of the country and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008 by reducing it at a minimum rate of 0.3% annually. The Act provided that the government shall not borrow from the RBI except under exceptional circumstances where there is temporary shortage of cash in particular financial year.

However, due to the 2007 international financial crisis, the deadlines for the implementation of the targets in the act was initially postponed and subsequently suspended in 2009. In 2011, given the process of ongoing recovery, Economic Advisory Council publicly advised the Government of India to reconsider reinstating the provisions of the FRBMA. With the upcoming elections in 2014, one can not believe that current government will take any harsh steps for the enactment of FRBMA and curtailing the fiscal deficit as it involves short term pain and the government doesn’t want to take risk. Considering the ongoing scenario, it’s hard to predict whether FRBMA will actually come into existence or not and how will India be able to manage its Credit Rating.