By Kashyap Arora
Edited by Anandita Malhotra
In the current global economic scenario, India once again finds itself at a cross road where timely implementation of crucial reforms can see it become a global power in the years to come. However, it is imperative to look into the current factors and performance indicators before going further into such discussion.
Firstly, Indian economy finds itself in a dilemma, with the agriculture growth contracting to a figure of 3.2%, however, still a robust growth rate considering the weak monsoons. This also points to the direction of rising share of commercial crops in overall agriculture production. Adding to this, we can also see weakness creeping in the manufacturing activity, which grew, only by 0.1%. The Capital formation growth — (computed as a ratio of investment to GDP) remained low at 32.3 per cent, falling marginally from the previous quarter’s 32.7 per cent, whereas growth in government expenditure slipped to 11.7 per cent from 13.4 per cent in the April-June quarter. However, it remained high, contributing to GDP growth.
Considering few of the above figures, some might dispute the presence of any optimistic feelings with respect to the Indian economy especially in the coming future, however, this is where the presence of a reform oriented national government and the present global economic conditions take the central seat. The government is already eyeing substantial reforms in the winter session of the parliament. There is a huge probability of an increase in the cap of overseas investors in insurance companies i.e. from 26% to 49%. This law would also raise the cap for the pension industry. The industry also expects that an increase in cap would ultimately result in a $2 billion inflow in the insurance sector. Adding to this impetus, are other major reforms such as the reforms in the land and labor laws and strategy to implement India’s first nationwide service tax union by April 2016 and if successful, economists say the measure could add 2 percentage points to GDP growth. Recent measures such as easing of the environmental and forest clearances for mines, roads, power stations and irrigation systems along with expansion in the monitoring role of project monitoring group will start taking effect from the third quarter onwards, thus laying the path for fresh foreign direct investment and future expansion in country’s infrastructure facilities.
Focusing towards the recent happenings in the world economy, the withdrawal of quantitative easing measures and the prospect of interest rate increase by the Federal Reserve will have a lesser effect on the Indian economy as such an event will not affect the Indian bond markets, as its bond market is already tricky enough for foreigners to enter at the first place, moreover, the main foreign investments can be seen in the equity markets which are already maintaining a positive outlook and seem to be more resilient in face of such outflows. Moreover, the fundamentals of the economy especially in terms of its current account deficit, seems more favorable this time in light of the commodity deflationary spiral in the world economy. This along with the quantitative easing program being initiated by Japan and the probability that the ECB might resort to such a program keeps India well insulated. Other global economic weaknesses such as the slowdown in China, also does not point towards a dismal picture of the Indian economy as only 5% of India’s exports go there. Further, quantitative easing by the Bank of Japan hurts Asia’s manufacturing exporters more than service-intensive India.
An economist from University of Warwick, Kashyap Arora is an avid reader, writer, and tactician with a real zeal for economics and finance. He has also professionally represented and worked for some of the most prestigious organizations such as Standard and Poor, and HDFC. It is his passion which drew him towards “The Indian Economist”, where he aims to study aspects of Indian economic and polity scenario from a different perspective and derive more involvement from his readers, thus, laying down the foundation for a highly aware future generation.