Is the Indian Economy at an inflexion point?:

Is the Indian Economy at an inflexion point?:

(Unprecedented economic boom

Context: Inflation has come down to its lowest level in several years

Introduction:

• The balance of payments situation is comfortable because stable capital flows are funding the current account deficit.
• The rupee is strengthening against the dollar despite intervention by the Reserve Bank of India.
• Foreign exchange reserves are increasing rapidly. Excess private sector debt casts a long shadow over this picture of economic stability.
• The banks are in a mess because many of the loans given out during the preceding credit bubble have gone sour. Private sector investment is very weak. Economic growth is too dependent on consumer spending.
• Indian economic growth took off a year after the mix of macroeconomic stability combined with balance-sheet stress.

What is the likelihood that India is once again at an inflexion point?

• The benchmark Sensex closed above the 32,000 mark for the first time on Thursday.
• Foreign portfolio investors continue to bet on India as one of the brightest spots in an otherwise glum global economy.
• Domestic investors have been eager participants in the party because of the rapid spread of systematic investment plans floated by local mutual funds, though valuations right now are far richer than they were 15 years ago.

There are two important differences in the macro matrix between 2002 and 2017.

• The five-year economic boom that ended in 2008 was marked by a splendid rise in capital spending by companies.
• Exports were an important driver of growth thanks to a vibrant global economy.
• In fact, a closer look at the components of economic growth during the two previous booms shows that the Indian economy grows more rapidly than its trend rate only when private sector capital spending takes off and a strong global economy provides support through demand for Indian exports.

Key points:

• New data from the Centre for Monitoring Indian Economy shows that new project proposals in the June quarter were at their lowest level in three years.
• Gross capital formation by the private sector has come down sharply over the past three years.
• The reasons are excess capacity in many industries, the fact that companies are using cash flows to repay debt and banks are not in a position to lend (though the corporate bond markets are picking up some of the slack).
• However, international organizations such as the World Bank, the Organisation for Economic Co-operation and Development, and the Economist Intelligence Unit are predicting a turnaround in private sector capex from fiscal year 2019.
• The World Bank has said in its recent India Economic Update that it expects private investment to overtake private consumption as the main driver of economic growth.

Conclusion: The big lesson that few in India want to learn is that economic stability through prudent fiscal and monetary policies creates the initial conditions for economic acceleration. And economic reforms that boost savings, investment and productivity are an essential ingredient of successful economic transitions.