Straight from the Specialists
The year ahead: expectations and apprehensions
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The economy is presently under stress and there are no indications that recovery is underway in spite of recent reforms announced by the government. India is not alone in under-performance. But it has fared too badly for its own reasons.
Problems are far too many. The worst is the political impasse. The UPA itself is truncated with the TMC out of the alliance and the DMK undecided whether to go along with the government. The opposition is bent on opposing any reform, even those they had themselves initiated.
In these conditions the UPA, or what is left of it, has to rely on other parties for support in parliament. This political support will undoubtedly be uncertain and will change from bill to bill. Consequently, the future of reforms, in spite of the firm commitment by the government, becomes cloudy.
Politics is one part. The economy has also developed its own problems which the government is unable to handle. The worst is inflation, which has many implications. The RBI has doubled the rate of interest which has cut into investment; diversion of purchasing power to agriculture has weakened industrial growth, and weakened growth has widened the fiscal deficit. Recessionary conditions in importing countries have hit exports. Left entirely to the market the rupee would have depreciated even further.
Against this background the prospects for the next year may appear bleak. The Congress is already getting ready for the general elections scheduled to be held in 2014, which may even be held earlier. Will early elections affect growth? Perhaps not. Election expenditure can itself be a mild incentive.
The winter session of parliament is important. While the government is keen to introduce new legislation, the opposition has a different agenda. The danger is that the upcoming parliament session may be a repeat of the monsoon session in spite of the persuasive efforts by the prime minister. Proposed reforms will most likely not go through, leaving the canvas as blank as it was before. But if reforms do go through, the economy will bounce back.
As it is, the economy has to recover without much assistance from the government. That is possible if inflation comes down in the first quarter of 2013, as expected by the RBI. That will prompt it to reduce the rate of interest. If inflation drops to 6 per cent and the RBI cuts the repo by 200 bps over three-four months, there would be a qualitative change in the economy
With headline inflation and interest rate down, there should be a pickup in investment and industrial production by the middle of 2013 and a shrinking of fiscal deficit. That should clear the way for foreign investment, both FII and FDI. The stock market would develop some verve even though it remains volatile mainly because of the Europe factor and the fiscal cliff in the U.S.
Sensex should regain its earlier peak of 21,000 before the end of the year. And, with normal monsoon, GDP growth should go over 6.5 per cent in 2013.