Business News This Week
Mumbai, Maharashtra, India
Frost & Sullivan presents a brief survey of the Indian Economy, its passage through 2014. From a policy perspective, the year 2014 can be divided into two distinctive phases demarcated by the change of guard at the Center in May-end. On the domestic front, a lethargic atmosphere of legislative, administrative, and bureaucratic paralysis gave way to a pro-active public culture of accomplishment and accountability. Internationally, foreign relations with the US, a key trade partner that had plummeted to rock-bottom after the poorly-handled diplomatic incident of an Indian Foreign Service officer in January, soared culminating in the US President accepting the invitation to be the chief guest at the 65th Republic Day celebrations in 2015. Meanwhile, the Prime Minister’s excursions abroad managed to not only capture the world’s attention but created a pipeline of foreign capital worth billions of dollars into domestic manufacturing. Mr. Modi, in the process, has smoothly transitioned from the Bharatiya Janata Party’s star campaigner and orator to India’s internationally-acclaimed brand ambassador even as he cemented his reputation as an effective statesman at home.
On the economic front, there have been equally positive developments, albeit largely due to exogenous factors. Within a year, the price of crude oil in the Indian basket has fallen by over 40 per cent from US $108.72 per barrel to US$60.58 per barrel in December easing off pressures on the twin deficits. With a continuing downward price trend, monthly oil imports have started falling since October and eased pressures off the trade deficit. It has also made the ambitious-looking fiscal deficit target of 4.1 percent of GDP more achievable due to an estimated fuel subsidy savings of almost US $1.7 billion aided by policy measures resulting in food subsidy savings and lower spending on welfare programs through greater efficiency.
Meanwhile, the easing of global commodity prices has reduced inflationary pressures; the consumer price inflation has nearly halved from 9.9 percent in December last year to 5.5 percent in October while the wholesale price index inflation has softened to 1.8 percent from 5.1 percent during the same period. Most importantly, the economy seems to have bottomed out with GDP growing at above 5 percent for three consecutive quarters. Indications of green shoots rising from better consumer and business sentiments signal even better times to come in future. It is quite likely that in a few years’ time, 2014 will be marked as the landmark year when things began to take a definite turn for the better for India.
Structural reforms addressing inefficiencies in the fields of energy, agriculture, labor market, taxation, and welfare schemes, will further unshackle the potential of the Indian economy. In particular, Prime Minister Modi’s focus on fast-tracking infrastructure development and energy security will ensure that roads, solar energy, smart cities, and other infrastructure segments see a larger inflow of investments. The uptrend in investor interest is also palpable amongst foreign investors with significant commitments from countries such as Japan and China across a wide range of established and emerging industries. While speed is of the essence for the Government to capitalize on its goodwill, years of bureaucratic neglect cannot be reversed overnight and it will take time for the Government to work through the backlog and bring in a coherent friendly framework for investors.
In the final analysis, India is not completely out of woods and it is imperative that the reform agenda is consistently followed. The Modi wave is leading to tectonic changes in the Indian political economy and the rise of new alliances is unlikely to be a smooth one. Against this background, the ruling coalition’s minority in the Upper House will hinder legislative reforms - the Insurance (Amendment) Bill and the Apprentices (Amendment) Bill were examples of this resistance in 2014. This will require the Government to seriously negotiate and adopt a non-confrontational approach with an opposition battling to save its turf.
If the developments of the past year and those currently in flux are a reflection of a changed reality that is here to stay, India’s growth is likely to rise to a high single-digit trajectory at the minimum by 2020. To this end, immediate reforms covering dispute resolution of pending highway projects, new gas-pricing policy, fuel shortages, timely project approvals, and better project monitoring of Government schemes have the potential to add around 150 basis points to growth taking it past 8 percent. The next Budget, due in February, is most likely to be the platform to start off the next set of more-difficult-to-handle reforms and give a better idea of the Government’s future roadmap of action. Other areas of reform in the medium term include the liberalization of the Labor Act, revision of the Companies Act, and review of the Land Acquisition Act. Beyond 2017 – the year when the ruling coalition is expected to reach a majority in the Upper House - the pace of reforms will pick up and a double digit growth by the end of the decade will become increasingly achievable. Combined with an inflation rate of around 5 percent, the end of the decade could see India rising to become a US$4.5 trillion economy.
The study was undertaken by the Innovation and Knowledge Center (IKC) which is the fundamental research hub of Frost & Sullivan’s consulting and strategy consulting business in the Middle East, North Africa, and South Asia. It consolidates all forms of research including technical, application-related, economic, financial, and market under a single umbrella. In addition to creating comparative studies for states such as the attractiveness index, the economic research arm of IKC has a portfolio of products which can aid a market player to understand the impact of various macroeconomic forces and make the best of them in a business environment. Some of these enablers are country profiles, multi-country comparative studies, PESTLE analysis, impact analysis of global economic and political developments, investment trackers, and economic pulse monitors.
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