Indian Economy after the new government formation
Pressures of the global economy
The economy of India suffered from genuine pressures from the global economy. The exports came down significantly while the imports rose. The rupee saw a slide of over 20% and along with soaring inflation, impacted the Current Account Deficit (CAD). Almost all industries suffered a slowdown and with the policy paralysis setting in, the bureaucracy could not stimulate the economy of India.
The global impact was only a part of the problem, the larger reason was the country being overwhelmed by the series of scams that hit the UPA-II, thereby eroding all the credibility it had gained though UPA-I. The bureaucracy went slow on decision making and the entire nation was living a negative sentiment and the same was true of the international investor community that took a bearish outlook on India to the point of the country being downgraded with the threat of being further downgraded to junk status.
Namo Mantra on Indian Economy
Hope from New PM Narendra Modi
As a reaction to the above, the people were drawn towards the hope that Narendra Modi offered an alternate, by projecting himself as a clear headed and decisive leader. As the elections drew closer the mood swing towards Modi had a positive response from the industry and the same began to reflect on the Stock markets.
Post elections (After the Elections in India) there is a definitive resolve from the government to address issues head-on and this decisiveness is only building upon the positive sentiment on the economy.
The first signs of the positive sentiment is seen with the Sensex crossing the 25,000 mark for the first time and the rise is expected to continue through the year. A comparison between the Stocks on 01 September, 2013 when the markets were taking a big it due to fund outflows and 09 June, 2014 shows how the markets have reacted positively with the new government coming in.
A comparison of S&P BSE Sensex between June13, 2013 and June 13, 2014 reflects the difference in sentiment and optimism in India as an emerging growth story:
Should we reduce import and encourage export for better economy
Sector-wise share in Indian Economy
The sector-wise percentage share of indices by market capitalization of the BSE Sensex shows: Finance - 25.46% ; IT – 17.99 ; FMCG – 14.55 ; Oil & Gas – 13.92. All other sectors have a single figure share of the Sensex, therefore, if there is a major policy impact on the four top sectors mentioned above, it will have an impact on the Sensex and by extension, the economy. All the top four sectors have shown above 25% growth barring FMCG (Fast-Moving Consumer Goods) that has grown marginally at 6.35%.
The growth is amongst the highest seen among the BRICS (Brazil, Russia, India, China, and South Africa) that was much touted three years back. But in 2014, it is India that is the emerging as the favourite with international investors and with increased FDI (Foreign direct investment) and FII (Foreign Institutional Investor) inflows into India, growth rates above 7% by (fiscal year) FY’15-‘16 looks very possible. If the Modi government can take politically sensitive decisions especially those relating to the economy, the Indian growth story could well go back to 8% plus by FY ’16-’17.
Base of Indian Economy
- Iran-Pakistan Gas Pipeline
- 2,700 km pipeline
- 110 million cubic metres of gas per day
- Cost Would be Down
Economic agenda planned by the new government
What could threaten the economic agenda planned by the new government (Know the Election Results of 2014 Election) is the situation developing in Iraq that is already causing a pressure on the price of Crude oil. In July 2013, the price of Crude Oil (Brent) was quoting in the region of $100 in June ’13 has now increased to $115 as on June 14 ’14. India is going to continue to be a large consumer of oil & gas and it has to either invest in more discoveries within India or secure reserves overseas through long term contracts and investment. Either ways, large capital is required and making that available while balancing other priorities is going to be a challenge for the new government.
India has to try and join the proposed Iran-Pakistan Gas Pipeline, while exploring other sources in the Central Asian region. The 2,700 km pipeline from the South Pars fields in the Persian Gulf, off Iran to Pakistan and further to India can transport around 110 million cubic metres of gas per day. The cost would be around four times cheaper than any other alternate.
Commercial viability and environmental impact
Shale gas could be a game changer for India, as the country has large reserves. However, the debate on the commercial viability and environmental impact is still a topic of much public debate and until a clear policy on this prepared, India will not be able to fully exploit the potential source of this cheap gas, to meet its growing demand for power.
The Coal sector has suffered through poor planning and we are importing coal due to lack of adequate production within the country. As per the latest data released by the Power Ministry, 21 thermal power plants have only four days of coal stocks left, while another 15 have only seven days stocks left.
Until recently, India was the world’s largest consumer of gold, a position now held by China. To control this unabated demand for gold, India has been importing large quantities that had an impact on the forex outflow. To reduce CAD, the UPA II government took measures to curb imports of gold. While it did have an impact towards reducing the CAD, the fallout was that gold smuggling increased, as a result of the official curbs on imports. The new government is in the process of reviewing the policy on the back of strong lobbying by the Gold & Jewelry manufacturing sector.
Narendra Modi economic policy
Indian core sector industries
Other core sector industries to suffer in the slowdown included cement, iron & steel, aluminum, etc. Iron ore production came down drastically due to strictures on mining in Goa, Karnataka and Odisha. This month Tata Steel announced that it was importing iron ore to meet its critical needs. The BJP government has started to look at these issues and the present Minster for Environment, Prakash Javadekar, has already announced that core area projects implementation will not be delayed on account of lack of environmental clearances.
India is well positioned to grow rapidly if the government can push for policy reform and faster implementation of core sector projects that require large capital deployment. This will catalyze the economy to the growth rates of 7% and above. Read the Achievements of Modi Government