An inkling of hope

There are inklings that the economy is on a path to recovery, with the index of eight ‘core’ industries rising 7.3 per cent year-on-year in June and merchandise exports growing 10.2 per cent in dollar terms. The HSBC India Manufacturing Purchasing Managers’ Index, a measure of factory activity based on monthly surveys of private sector company executives, posted the highest increase in 17 months in July. Meanwhile, the worst fears about the monsoon seem to be over. Rainfall deficit, which amounted to 43 per cent in June, fell to below 8 per cent in July. Yes, the delayed onset is unlikely to help cover the shortfall in kharif plantings and will hurt crop yields where sowing has happened well after the optimal time. But if the rains in August and September are normal — not ruled out, as most global models are now predicting a weak El Nino event and that too only towards October — farm output may still not suffer as much as many feared. This will provide relief on the inflation front.

At the same time, however, there are global headwinds that are a cause for concern. The most significant of them is a possible rise in US interest rates, following a 4 per cent GDP growth for the April-June quarter and the creation of over 200,000 jobs for six consecutive months, for the first time since 1997. The US Federal Reserve has already reduced its monthly purchases of long-term bonds from $85 to $25 billion since the beginning of the year. A sustained recovery could see the Fed ending this monetary stimulus and even raising its benchmark funds rate from zero to the 0.25 target range. The prospect of rising US Treasury yields, alongside a debt default by Argentina last week, has sparked a renewed sell-off in emerging market stocks.

But India is much better placed to handle a funds pull-out this time than it was last year, when the Fed first signalled a taper of its quantitative easing policy. Between then and now, the country has added over $40 billion to its official forex reserves. Unlike in August 2013, its current account deficit is under control, growth is slowly returning and inflationary pressures are also receding. Add political stability to this and India looks less vulnerable than other emerging economies to the threat of a capital flight. The Centre should capitalise on this by strengthening India’s image as well as its attractiveness as a destination for global capital. This will mean a continuing commitment to reform, through fresh policy initiatives and speedy execution on the ground.

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