Strong Macroeconomic Fundamentals of the Indian Economy

Macroeconomic fundamentals refer to factors in the real economy that drive growth and help to sustain it in the medium term e.g. agriculture, industry, exports, investment, inflation, etc. The encouraging picture on the monsoon front, surge in forex reserves, pick up in growth in manufacturing, services, exports and imports, along with moderate inflation, signal that India’s macroeconomic fundamentals are strong.

 

The Indian economy displayed its resilience last year also when despite drought and setback to agriculture. Inflation remained under control and the balance of payments remained comfortable. India is a market that cannot be ignored. Several companies are seen as measuring to international standards, successes in software include progress from mere coding to high-end R&D, there is a boom in outsourcing, companies have been successful in penetrating regulated markets in pharmaceuticals based on intellectual property, there is success in manufactured exports, and increase in travel to India on business.

 

India, along with China, is seen as an engine of world economic growth in the current scenario of sluggishness. Even from a long term perspective, the picture appears bright. A recent report by Goldman Sachs has referred to the long term growth potential of Brazil, Russia, India and China – together called BRICs – which together are expected to become bigger than the G6 countries in 40 years.

 

India is expected to grow even faster (by more than 5% a year for the next thirty years) and is predicted to have a larger GDP than Italy by 2015, France by 2020, Germany by 2025, Japan by 2032 and will narrow the gap with the US economy. The Government has adequate food grains stocks, providing a cushion against any adverse developments.

 

Banks have posted excellent results. Their profits are buoyed by profits on sale of investment. Housing finance companies have benefited from the boom in retail lending. Manufacturing companies have experienced growth and sectors such as automobiles, auto ancillaries, steel and textiles have shown good results.

 

For the first time in five years, the number of ratings for upgrades by CRISIL has exceeded the number of downgrades by 4:1. The turnaround is broad based and sustainable as more companies are looking at better cash flows and much better debt repayment capabilities along with stress on corporate balance sheets including cost cutting, better inventory management and rationalization of labor.

 

In recent years, the export basket has become diversified with manufactures accounting for around three-fourth of total exports. The increase was mainly on account of higher oil imports largely due to firm up on international prices through non-oil imports also registered a healthy growth. Among non-oil imports, there was a sharp increase in imports of edible oils, transport equipment, cashew nuts, electrical goods, machine tools, pearls and precious stones and non-electrical machinery.

 

The reserves can finance over 18 months of imports. The surge in reserves was due to the inflow of export proceeds, increase in software earnings and remittances from overseas Indians (NRI deposits) along with the inflow of foreign capital.

 

It is particularly noteworthy that the World Bank has now classified India as a less indebted country against the earlier classification of moderately indebted country. India had also decided to pre-pay its bilateral loans to countries other than Japan, UK, Germany, USA, EC, and Russia.

 

India has now joined the IMF’s lending pool and will contribute to the Fund’s Financial Transaction Plan which helps countries overcome their BoP problems. All this sends a strong signal to the international community regarding the country’s strength and the resilience of its external sector.

 

This signals their positive perception about the Indian economy on the back of good near-term business prospects, undervalued stocks, facility to trade in a regulated and modern market system and appreciation of the rupee which is accentuating the higher returns on their portfolios.

 

Inflation is expected to ease with kharif production coming into the market. In any case, 4-5% level of inflation is welcome for a growing economy and with comfortable supplies of food. Forex and manufactures, prices are not expected to come under pressure.

 

With the shift to paperless trading (demat), rolling settlement, risk containment measures (derivatives trading) and better trading and settlement systems, along with greater transparency and stricter regulation, the Indian stock markets compare with the best in the world.

 

Economic reforms have been continued. Several initiatives are announced in the Union Budget. Exim Policy and Credit policy have been put in place, along with progress in infrastructure, privatisation, tax reforms, trade and external sector liberalisation and industrial reforms. Legal reforms and several economic bills have been pushed through e.g. Securitisation Bill, Electricity Bill, Competition Bill, etc.

 

Continuing reforms in the banking sector have strengthened the profitability and efficiency of commercial banks along with better regulation and supervision and adoption of international best practices. There is need to build up the required infrastructure support, which is the key to value addition in agriculture, industry and exports. Reforms in agriculture must be addressed urgently including increasing productivity, accelerating diversification in agricultural production and greater access to markets.

 

On cost cutting and restructuring, Indian industry appears in far better shape than at any time in the past. However, the likelihood of this change in economic direction growing into a meaningful improvement in the state of the economy would be critically dependent on the growth in investment activity. At the same time, employment needs to be expanded in the economy as the present situation of the jobless recovery is not sustainable.

 

India is well poised to attract an ever rising proportion of new investment from the global growth industries. More than 40% of the world’s largest 500 companies now carry out some of their back office processing in India. Global automobile, pharmaceutical, biotech, financial and IT companies are leveraging India’s strengths in IT, research, design and production.

 

According to participants at the CII Partnership Summit, India is seen as the fastest growing economy among the world’s democracies. In India, there has been a steady progress in tariff reduction, financial sector liberalization and industrial sector de-licensing which are contributing to more efficient capital allocation and robust external sector. With steady reforms happening in financial, banking and service sectors, FDI is expected to improve sharply.

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