Positives and negatives of the India story

In February 2015, a photograph went viral on the Internet, with opinions divided on whether it was coloured blue-black or white-gold. A similar, earlier example had viewers debating whether the picture was of a young girl or an old hag. Our views are shaped by our perceptions and, as the Moody Blues sang in ‘Knights in White Satin’, ‘red is grey and yellow black, but we decide which is right, and which is an illusion’.

We need to see both sides of the story before reaching a conclusion. India’s story has negative as well as positive sides to it.

Amongst the negatives are a weakening current account deficit (CAD), thanks to a sharp rise in prices of crude oil, which has resulted in a weakening currency, which, in turn, has lowered the dollar returns for foreign investors. Higher price of crude has resulted in high petrol/diesel prices, resulting in higher inflation, to counter which the RBI may need to raise interest rates. The risk of a higher fiscal deficit is also worrying investors, as is the slow pace of job creation.

Yes, higher crude prices have caused a deterioration in CAD and a fall in the rupee, but the question investors, including foreign ones, need to ask is whether crude oil will continue rising, and the rupee continue weakening, for long.

Compensating factors

Fiscal deficit will likely be more than the estimated 3.2 per cent, at 3.5 per cent. GST tax collections and sale of PSU stocks would compensate higher expenditure, provided the government does not go on a spending spree prior to the 2019 general elections.

Creation of new jobs continues to be a worrying problem, especially in the backdrop of increasing automation/robotics. These would, one imagines, come more from small and medium enterprises rather than large manufacturing units.

Amongst the positives is a forecast of normal monsoons. With the majority of population dependent on agriculture, which contributes 14 per cent to national income, a growth in this would help achieve the GDP growth target of 7.5 per cent.

The legacy issues of bad loans in the banking sector is being addressed. The introduction of the bankruptcy law has resulted in settlement of dues; over 2,100 companies have settled ₹83,000 crore of bank dues. The buyout by a Tata Steel subsidiary of Bhushan Steel has also helped free a big chunk of corporate debt, and is the harbinger, hopefully, of more such deals.

Creation of roads is progressing well, at a significantly higher clip than during previous governments, and now the focus will be on developing India’s waterways, a far cheaper form of transportation.

Where we now need to focus is our areas of weakness, viz, the slowness of the judiciary, and the enforceability of contracts. Foreign investors, both direct and indirect, are reluctant to come in because they do not trust courts to enforce contracts.

Indian retail investors are switching from bank deposits to mutual funds for investing their savings and providing the cash flow for a sustained bull run. But our policies have to be proactive and suitable.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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