India's recovery still far away

Wed, 6 Nov Pre-Open

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It is probably for the first time that markets have touched a new high and we have not seen celebrations which are generally seen during such occasions. Enthusiasm is completely missing among the retail participants.

In November 2010, when the Sensex touched a record high, the economy was booming, thanks to the government stimulus. Growth in the December quarter in 2010 was a scorching 9.2%. The rupee was stable, factory output was robust and the fact that India had emerged largely unscathed from the bruising global financial crisis had ushered in a sense of optimism.

But 2013 is a different story. The stock market may be booming, largely fuelled by foreign institutional investor money, but the overall economy is still groaning under the weight of a slowdown. Infact, according to the HSBC India Manufacturing Purchasing Managers' Index (PMI), India's manufacturing sector activity contracted for the third straight month in October. Order flows remain weak, despite a bounce-back in export orders after two months of decline. Moreover, businesses continue to cut back purchases and a rise in inventories suggest that output will remain subdued. The same situation is echoed by the services PMI data. The HSBC services PMI continued to contract for fourth time in a row in October.

The three biggest problems that plague our economy today are decelerating economic growth, rising inflation, and a widening current account deficit (CAD). The government has lowered the \CAD target for this year to US $60 bn from US $70 bn. Whether it is actually able to do so and whether this will be sustainable remains to be seen. Inflation still continues to remain high. Supply-side inflation in particular needs to be tackled. This can only happen with sound and transparent government policies. The RBI in its fight to tackle inflation had raised interest rates in its October monetary policy review. But the government also needs to show some initiative in dealing with supply side shocks. The silver lining in the cloud so far has been healthy monsoons. And there are hopes that this should help in easing inflation to some extent and also bolster rural incomes and thereby demand.

While FY14 would most likely turn out to be another subdued year, things should start picking up FY15 onwards. But for growth to reach the next level and to remain sustainable, implementation of some key reforms has to be the topmost item on the government's agenda.