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India's Third Giant Leap

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Will the economy recover in 2014?
Fri, 20 Dec Pre-Open

The year 2013 turned out to be an interesting one for India equity markets. Both the benchmark indices BSE-Sensex and NSE-Nifty touched an all time high. But the euphoria stops there. Most of the rally was led by foreign institutional investors (FIIs). The foreign institutional investors made a net investment of Rs 727.9 bn since the beginning of the year. During the same period the domestic institutional investors sold Rs 656.9 bn. Hence, retail investors completely stayed away from the rally.

The reason for this is the health of the Indian economy. And according to rating agency Moody's, India's economic growth remains weak and there is little chance of recovery next year. Complicated taxes and regulations, weak infrastructure, and a weak central government is expected to hurt confidence and demand, thus keeping GDP at lower levels. And on top of this, inflation is still stubbornly high. Because of this interest rates have been firm. That, in turn, is hindering speedier economic revival.

But there are signs that the economy might have bottomed out. India's current account deficit (CAD), which swelled to a record 5.7%of GDP last year, contracted sharply from 4.9% of GDP earlier this year to only 1.25% in Q2FY14. The current account deficit of US $5.2 bn is the lowest India has seen since June 2009. India's manufacturing output showed improvement last month as rural demand for goods such as tractors, motorcycles and consumer goods continued to rise. Factories increased output. With the recent improvements in some important sectors like manufacturing, better performance of exports and with measures taken by the government, the economy can be expected to show further improvement.

However, the political uncertainty linked to the upcoming elections is making foreign investors anxious and hampering investments. The new government would have to do a lot more than mere cosmetic changes to revamp the Indian economy. There is a strong need for an overhaul in the economic environment. Doing business in India should not be so difficult and clear cut reforms are needed to promote growth.

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