The year 2013 in perspective
(Any opinions expressed here are those of the author and not of Thomson Reuters)
The economy was already in distress before 2013, but with no significant action by the government and increased pressure from external sources resulted in more danger signals. It is now doubtful whether the economy will recover in the current fiscal.
The rot began in 2011. It took hardly two-and-a-half years to bring down the growth from 8.8 percent to 4.5 percent. The monsoon was good but badly distributed with the result that the summer crop did not show much improvement. Industry is amidst stagnation with zero growth in April- October. The capital goods sector has been hit the hardest because investment declined, while the only silver lining was the improvement in external trade. Exports increased and imports declined which brought down the CAD to less than 2 percent of GDP.
The stock market had lost steam. The U.S. Federal Reserve’s declared intention to taper its stimulus kept markets under pressure. FII outflows drove the Sensex down to 18,000 and the rupee to 68 to the dollar. That forced the Reserve Bank of India (RBI) to take emergency measures and build up an additional $34 billion reserve to meet future contingencies. On December 18, the Fed finally announced tapering by $10 billion which made little difference in the stock or currency markets.
The economy is still struggling to catch up with growth. Any recovery must start with industry and it can start only if food inflation is subdued. It is not realized that inflation was government sponsored to a large extent. The three major sources of inflation were the continued increases in minimum support prices of agri-products, the huge expenditure on rural employment schemes and budget deficits at centre and the states. Lower demand and higher interest rates squeezed profitability of industry discouraging and disabling investment.
The environment for growth was also vitiated by exaggerated charges of corruption which paralysed governance in the country. Fragmented parliament made reforms impossible while GAAR and retrospective taxation changes also weighed. Finance Minister P. Chidambaram did make an effort to salvage the economy, but it takes time to reverse direction.
December came with political surprises. The convincing win of the BJP in assembly elections pushed the Sensex beyond the previous peak after nearly three years. How the economy and the market will behave in 2014 depends on the outcome of the general elections. If a strong coalition comes to power, the economy will zoom.
The first target has to be inflation for which supply side has to be looked at along with facilitating marketing. With that other things will fall in place. Interest rates will drop, investment will revive and growth will pick up. Until then, the stock market will be volatile and the rupee will be relatively stable.