The Modi government is completing 3 years this month and have they built a strog economic foundation for growth? The next 2 years will be critical for the government as the country is coming out of a long period of below average economic growth and growth has to pick up for the government to stake its claim for a second term in 2019 general elections.
Going by numbers, the government has done a good job in the critical area of handling its finances, which has been well appreciated by the markets. Fiscal deficit as of % of GDP has dropped from 4.5% in March 2014 to 3.5% in March 2017 and is forecast at 3.2% for March 2018. The government has resisted pump priming the economy through a borrow and spend policy. India’s economic growth has fallen from over 8% levels to 7% levels over the last few years.
Government’s eye on its finances has enabled inflation to come off substantially with CPI inflation down from 8.31% to 3.81% from March 2014 to March 2017. The improvement in government finances coupled with fall in inflation has led the yield on the 10 year gsec down by 196bps over the last three years.
Capital markets are positive on the future with the Sensex & Nifty up by 32% and 37% respectively. The INR is down 6.87% over the last three years but this has to be looked at from the perspective of a very strong USD, which gained 25% against the majors in the last three years. The INR is however looking up with gains of over 5% over the last six months.
Foundation for Growth is Good
Improving government finances, low inflation and low interest rates are highly positive for both consumption and investment demand in the economy. The government will also roll out the much required indirect tax reform, the GST, in July or in the second half of this year. The demonetization move in November 2016 has left the banking system flushed with liquidity and this will keep down interest rates in the economy.
Trade too has picked up with exports showing high double digit growth over the last two months. Global economic conditions are markedly better with data showing strong gains in the Eurozone while the US continues to stay strong. Read our global economic data analysis for assessing the strength of the global economy.
The worry points are growth issues in oil exporting countries given the low prices of oil that has come off by 50% over the last three years. Slowdown in the IT sector, that has been the single largest white collar job creator over the last two decades is an issue as urban spending power can be hit leading to a cascading fall in demand.
Other growth issues include automation in manufacturing leading to displacement in the sector, China growth pangs that can lead to drop in world aggregate demand, climate changes and geo political issues.
The Modi government does have its task cut out in the coming years but if it sticks to its agenda on economic stability and reforms, other factors can fall in place to push growth higher.