India - The economy - 2013 Recap
US Fed QE and its taper -
The most important topic which has been affecting the entire world economics is the process of QE and its taper. The Fed has been virtually pushing loads of money into the economy every month. This money has flown into Indian bonds and equity markets too. The fear of taper had caused this money to be pulled out from India leading to severe fall in Indian equities, currency and bonds too. With US doing better, the Fed has finally announced the taper though the rates should remain low for an extended period. This would stop the supply side of money though with improvement in overall economic conditions, the business climate could get better. But with the closure of the tap, India has to do fundamentally better now to attract investments and the flow of easy money into the economy will be much lesser. If there is no improvement in economic conditions, 2014 will be even more tough than 2013 for Indian business and equities.
Union Budget -
With the government of India maintaining its record of doing nothing to improve overall economic outlook of the country and ensuring that businesses keep struggling with higher taxation and more curbs in the name of improving fiscal deficit, India Inc was pushed back into troubled waters. The combination of one of the most educated finance minister and prime minister failed to create an impact as they came up with another disappointing budget which was to say the least was a reflection of how poor the governance has been in the past 10 years in the country. Business in 2013 have felt the problems of this and hope that things improve in 2014.
CAD and Rating agencies-
With most rating agencies across the world from fitch to moody's to S&P having a close look at the Indian economic conditions and keeping their eyes open to the possibility of downgrading India to a junk rating, their views and reviews have been a part of the headlines. Though most of them have not downgraded India, they have maintained their negative outlook meaning that the possibility of downgrade still remains in 2014 which could push India into a catastrophe of global economic turmoil.
Currency - USD INR crossing 60
With the current account deficit and trade deficit increasing continuously combined with outflow of capital because of QE tapering, Indian currency ended up being among the 3 worst performers in the global currency space. With its brother countries in BRICS viz South Africa and Brazil doing equally bad, there was a little bit of saving grace for the finance minister to say that every problem in Indian macro-economics is caused by global factors. The government failed to acknowledge that the local factors were equally bad with exports suffering despite lower currency value. The Indian currency saw a new low of approximately 68 levels v/s the dollar and has settled around 62 since the recovery. 2014 poses a huge challenge considering that there could be political turmoil combined with QE taper.
Gold curbs-
The finance minister went all guns blazing to curb gold imports. He has been somehow made to believe that the currency crisis in India is because of the gold imports that we have. India is among the largest consumer of gold and the largest part of the import bill consists of gold. However, the curbs have not been able to put any significant improvement to Indian currency though gold imports have gone down very significantly. As usual, the government has not been able to address the main concern which is the growing sentiment that the businesses in India are in trouble, exports are declining, receding foreign investments and growing discontent of International investors for returns generated on investing in business in India.
GDP growth and downward revisions-
With the GDP growth rate on continuous downward trajectory and printing less than 5% growth rate, India has seen a new low in the recent past with regards to its pace of GDP expansion. Industrial activity has declined miserably though agriculture has shown much better than expected performance. Policy makers have continuously been expecting a pick-up but have not been able to see any signs of it as yet. There is fair bit of optimism that the worst has passed by though things have not seen too much of improvement as yet. With US and Europe back to expanding at a good pace, India should be able to start growing back at a faster pace.
Inflation-
This has been the most significant header on the news lines and has kept the RBI governor on his toes over the past 1 year. With inflation well above the RBI target for the entire year and printing near 10% levels for the year, the average consumer has felt the brunt of the price rise. Most households in India have been affected by it and are rather severely hit by them. More significant was that the price rise of onion in India not only made headlines in Indian news channels but got coverage on US CNBC too! The RBI has been taking steps to control the demand side though the supply side which is generally the prerogative of the government has not been addressed and prices have stayed stubbornly high.
Index of Industrial production/ PMI-
The PMIs and IIP numbers have more or less disappointed though the last print has been fairly optimistic which gives us a feeling that greener times may be seen by Indian business in 2014. With HSBC raising its expectation for growth in India and HSBC PMI showing some pick-up, there is some light at the end of the tunnel for Indian businesses.
Midcap crashes-
20% crash in price of Indian stocks have become common stories in India. With stocks like Infosys crashing 20% in a day, questions have been raised on the liquidity and depth of the stock market in India. Many mid-cap stocks have seen more than 50% erosion within 3 days which has severely dented investor confidence in India. Well known companies like Apollo tyres, Titan, Infosys, Wockhardt, Jindal steel etc have all seen such significant declines at-least a few times this year.
Political factors-
2013 showed a few landmark shifts in the Indian political scenario. With corruption and inflation being major concerns for the common man in India, there has been strong public outrage over the current government in India and has led to them getting uprooted in local assembly elections. New parties have come to power and 2014 will see the prime ministerial elections. There is a possibility of congress going out of power and a new party and new prime minister coming to power.
Reform measures and failures-
The finance minister promised huge number of reforms which not only made the business optimistic but also saw the congress parting away some of its allies. Though some of them like partial de-regulation of diesel prices did happen, the business community was left wanting for more. Reforms have been slow and the process of implementation has been slower leading to little benefit to Indian business climate.
Food security bill and other populist measures-
This was another landmark announcement by the government of India to ensure that food will be provided to every Indian at almost zero prices. Though this was good in terms of ensuring that no Indian stays without food, very few things have changed. The poverty still remains and there have been reports on deaths due to starvation in the country. This bill has been publicly criticized by most economists in India saying that it will affect the government balance sheet severely and raises the possibility of higher taxes. Also social activists and philosophers have been criticizing it saying that this reduces the efficiency of work-force and would lead to more and more people moving away from working as food is freely available. All in all, the only motive seen behind it by most people is to ensure that congress is able to garner more votes in 2014 due to it at the expense of Indian economy and Indian tax-payers.
RBI and major changes-
RBI saw the change of its head this year. It saw the replacement of one of its best governor's by another great economist. Mr. subbarao, the outgoing governor had won kudos from most global economist for his handling of the central bank of India. He was partially restricted in pursuing his plans to support the economy as most of the times, he was fighting the ever increasing inflation situation in the country. He still managed to do exceedingly well considering the constrained environment around him. The new governor of RBI, Mr. Raghuram Rajan has been one of the most respected economists not just in India but across the world. There is widespread optimism that he will be able to pull out India from the current mess of high inflation and low GDP combined with increasing deficits and ever depreciating currency value.
To conclude, 2013 has been one of the toughest year for Indian businesses and investors though there is some light at the end of the road and with prime ministerial elections in 2014 combined with QE taper, there will be huge number of challenges and opportunities for Indian business in 2014.
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