The Indian economy which is on a path of recovery since 2014 will continue to be on a high-growth trajectory this year, says a senior economist with a London-based consultancy CRU.
Fundamentals of Indian economy are recovering due to the continued improvement in India’s fiscal and current account balances, Grant Hixon said.
“Given the market imbalances, softer commodity prices, in particular food and oil are expected to remain lower for even a longer period. This will help to contain inflation and result in higher disposable income for households, thus raising private consumption,” he said.
Lower prices should provide room for a more liberal monetary policy. “We believe that the interest rate cut in January and March 2015 marked the start of a loosening monetary cycle, and further rate cuts are expected later this year, which will boost confidence in the economy and be met with approval by the industry,” he stressed. The industry has been clamoring for cheaper credit for a long time now.
The rupee should continue to gradually depreciate against the US dollar. It is forecast that the currency will fall to around Rs 62-63 by the end of this year against the greenback, which will boost competitiveness. It will translate into stronger growth in exports this year.
While the Indian government is unlikely to meet the market’s high expectations of big bang economic liberalization, the consultancy remains cautiously upbeat about the prospects for progress in reforms, particularly with regards to improving investment in infrastructure.
The government is likely to continue to use the path of ordinances – executive orders which bypass parliament – to cut red tape, liberalize foreign investment and deregulate key parts of the economy, for example in land acquisition, but miss the mark on reforms such as tackling restrictive labor laws which require radical overhaul and greater political support. Even ordinances need to be approved by parliament within a stipulated time frame and this is going to be a serious challenge with government being in a minority in the Upper House, the Rajya Sabha or the Council of States.
The Fiscal Year 2015/16 Budget, announced February 28, has provided some clarity on reforms. Corporate tax will be lowered in phases in conjunction with the doing with exemptions, wealth tax will be replaced with a surcharge, gold will be monetized, health insurance will be encouraged through more tax exemptions and Forward Markets Commission will be merged with the Securities and Exchange Board of India. However, much more needs to be done.
Risks to our forecast are balanced in the near-term but tilted to the upside further out. More supportive fiscal and monetary policy would boost growth in the near term, but higher inflation would dampen demand, while acceleration of reforms can generate stronger, more sustainable, economic growth in the medium term.
Grant Hixon is responsible CRU’s macroeconomic and industrial sector coverage of Asia.
