By Devangi Narang
With several policy initiatives implemented recently, the Indian economy is undergoing a major transformation. The recent data released by the government on 12th July 2017, indicates that the $2.3 trillion Indian economy is struggling amid government reforms, rankling bad loan crisis, rising unemployment, and a widening output gap.
Sluggish industry performance
According to this data, the industrial output growth plummeted to 1.7% in May from 8% a year ago. Moreover, the Consumer Price Index (CPI) inflation level touched a historical low of 1.54% in June. The government said such a low level of inflation was last seen in 1999; prior to that, August of 1978.
This recent data on industrial output points to a slowdown in the manufacturing sector due to adjustment in production in the run-up to the implementation Goods and Services Tax (GST). The poor performance of the mining, power, fuel, steel, textile and aviation sectors have led to mounting bad loans in the economy. Some of the pessimism also stems from the fact that India is still recovering from the 2016 demonetization move.
RBI readying for a review
Many economists and bankers believe that this drastic fall in industrial growth and retail price inflation has given room to the Reserve Bank of India (RBI) to cut its policy rate at the review meeting on August 2. Estimates hold that the RBI is expected to cut it by 25 basis points. In its last policy review in June, the RBI kept the interest rates on hold citing risks for inflation after the GST introduction and the 7th Pay Commission guidelines.
Conversely, many also believe that this rate cut won’t reap many benefits because, although it would lead to lower borrowing costs, it will not be able to revive investment or credit growth (which fell to a 40-year low of 5.1% in 2016–17). Many economists and analysts believe that the leverage is concentrated in certain sectors such as steel, infrastructure, and telecom. The debt levels in these sectors are so high, it is unlikely that monetary policy will be able to improve the situation meaningfully.
A different school of thought believes that the RBI may continue with its hawkish approach for the next bi-monthly policy and instead consider a rate cut in its policy review due in October.
On 13th July 2017, the Sensex breached the 32,000 mark for the first time, while Nifty closed at a new peak of 9,892. The stock markets stayed strongly bullish until the end of the trading session. This rise was based on hopes of a rate cut from the Central bank following the government’s historically-low CPI data revelation.
The bullish behaviour was also tracking higher global market movement prompted by the US Fed’s statement. Federal Reserve Chair Janet Yellen raised the possibility that the Fed would consider slowing the pace of its interest rate increases if inflation remained persistently below its target level.
Traders and analysts also anticipate ample liquidity in the market amid optimism over earnings from blue-chip companies. The policies introduced by the Narendra Modi government have provided a sense of optimism in the markets. Foreign portfolio investors (FPI) have also been supporting this rally by pumping money into domestic markets. According to National Stock Exchange (NSE) data, FIIs (Foreign Institutional Investors) have invested $8.24 billion and domestic investors have pumped in Rs 24,596.86 crore in Indian markets in 2017 so far.
The new data has been surprisingly on the downside; this has had a domino effect on various other sectors. The government’s recent policy initiatives have been the prime reason for such a slow down in the economy. The stance of the government is that these policies will surely be beneficial in the long run. However, it is unfortunately only with time that the government’s policy initiatives will reap fruit and pave way for economic consolidation at the macro level.
Featured Image Source: Visual Hunt
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