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Straight from the Specialists

Where the growth in Q1 came from

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

GA man walks his cow under high-tension power lines leading from a Tata Power sub station in Mumbai's suburbs February 10, 2013. REUTERS/Vivek Prakash/FilesDP growth of 5.7 percent in the April-June quarter was unexpected in view of the southward drift of India’s economy over the past two years. No wonder it pepped up the Bharatiya Janata Party-led government at a time when the ruling coalition is listing its achievements after 100 days in office. The question is where this growth came from and whether it will be sustained in future.

India’s economy has been slowing after achieving 9 percent growth three years ago. That was because the Congress-led government failed to fuel the economy. The absence of policy reforms, paralytic governance – combined with persistent inflation – discouraged investment. Growth tapered to 4.7 percent last year.

The Q1 data seems to signal a recovery with growth jumping to 5.7 percent. Some sectors did perform exceedingly well with over 10 percent growth. The first is electricity though its size in the overall economy is small. But it has now come up against stubborn problems like coal shortage, which has harassed the power sector. Coal production is unlikely to increase and the power sector will have to fall back on imports. The 10 percent increase in power generation contributed 3.4 percent to the increase in GDP in the first quarter.

Business services such as finance, insurance, and professional services like IT also exhibited high growth. This sector is a major contributor to GDP and constitutes nearly a fifth of the economy, and developed at a double-digit rate. Consequently, about a third of the increase in GDP has come from this sector alone.

India Markets Weekahead: Time to prune positions in an extended honeymoon

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Nifty closed at a new closing high of 7,954 amid volatility in an eventful week that started with the Supreme Court ruling that the allocation of more than 200 coal blocks over the past two decades was illegal.

With nearly 3 trillion rupees at stake, this had a direct effect on the metals and power sector. It also affected banking, which has exposure to the two sectors.

‎India Markets Weekahead: Correction could follow budget week

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Last week’s robust pre-budget rally belied expectations, with the Nifty closing up more than 3 percent at a record high of 7,751‎. Automobile sales, manufacturing PMI as well as services PMI showed an uptick. The Iraq turmoil seems to have taken a back seat with oil prices receding from a nine-month peak. A rally in world markets, with life highs for the DJIA and S&P 500, also aided sentiment.

India’s fiscal deficit in the first two months has already touched 45.6 percent of the full-year target. Though this would have been a negative indicator, the markets welcomed Finance Minister Arun Jaitley’s remarks about focusing on fiscal consolidation against “mindless populism“.

Higher tax revenue from higher growth

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The 2013-14 budget got completely out of hand because of a whopping shortfall in tax revenue. Development outlays had to be drastically cut to manage the fiscal deficit.

The key to the budget is revenue. The ratio of gross tax revenue to GDP reached a high of 11.9 percent when GDP growth was at its peak of more than 9 percent in 2007-08. Since then, both declined and the ratio has been in the narrow range of 10-10.7 percent. GDP growth is a painless way of raising revenue.

India Markets Weekahead: Pre-budget rally may be muted

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A man looks at a screen across the road displaying the election results on the facade of the Bombay Stock Exchange (BSE) building in Mumbai May 16, 2014. REUTERS/Danish Siddiqui/Files(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Nifty touched a new high of 7,700 before cracking on Friday to slip about 0.5 percent for the week. This was primarily triggered by the unrest in Iraq and the subsequent rise in crude prices.

The markets were also overbought aided by a relentless rally since May 9‎, with the CNX Nifty climbing about 16 percent, S&P BSE Midcap Index rising 26 percent and the S&P BSE Small cap index jumping 35 percent. The last one-month saw 115 multi-baggers with 92 percent of traded stocks gaining during the period. The probability of picking a loser was minimal. It seemed making money had never been so easy.

How to get India on the highway to high growth

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The president’s address to parliament this week lays out the new government’s roadmap to get India’s economy back to high growth. That will take time and is not easy either.

True, the BJP government led by Narendra Modi inherited a weak economy – growth was a mere 4.7 percent; industry was static; there was no employment generation; and inflation was at over 8 percent. The only comfort was that foreign exchange reserves exceeded $312 billion.

The primacy of good governance for Modi

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

At his second cabinet meeting, Prime Minister Narendra Modi unveiled a 10-point programme that set out a comprehensive agenda for his ministers. The agenda is a good cocktail of short-term needs and long-term objectives.

The underlying message, however, is of good governance. That is what Modi has been harping on during his election campaign and which he sincerely believes is the secret of his success in Gujarat.

Food prices matter: here’s why

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

Investors are cautiously starting to examine the topic of food price inflation once again. The United States recently saw a sharp rise in producer price food inflation. Further down the economic development ladder, producer prices for the food manufacturing industry of China have been steadily creeping higher from the lows reached two years ago.

The rupee at a crossroads

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The rupee was tossed around quite a bit in the last 10 months. It dropped to a low of nearly 69 to the dollar, creating an economic crisis, before it recovered and is now at 59-60. The threat is not that it may drop once again, but that it may appreciate further and upset the economy in other ways.

Why would the rupee appreciate? Because there are expectations the Narendra Modi government will facilitate development and enable the economy to get back on course. This is what drove the Sensex beyond 25,000. But the currency market was more stable in spite of the huge inflow of $2.2 billion in 10 trading days of May.

Steps the next government should take

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

India’s economy is tottering, inflation is too high and growth too low. The Congress-led UPA government allowed the economy to drift during its second term. Why? Because it did not focus on real issues, failed to govern effectively and did not carry out any significant reforms.

New legislation became almost impossible, with coalition partners such as the TMC and DMK threatening to pull out (and they eventually did). On top of that, successive scams made it impossible for the government to function normally.

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