The Indian economy has just experienced the weakest calendar year economic growth since 2002, and prior to that, 1991. The 1991 episode, which was a genuine balance of payments crisis, was the shock that the sclerotic system required to undertake fundamental market and internationally oriented reforms. India’s latest annushorribilis has not sparked a corresponding effort from policymakers to institute a wholesale reform programme designed to boost international competitiveness, increase market disciplines and raise potential growth in this capital starved, inflation prone economy. The pending elections, where the opposition BJP are now the clear favourites to win office – with incumbent Prime Minister Singh declining to run – are a constraint on the legislative arm.
India ran a substantial balance of payments deficit from May to August, leading to a rupee collapse. “No taper” saw a return of equity inflows, but Indian debt remained unloved by the international investor community. The post-shutdown revitalisation of Fed taper expectations, which were requited at the December FOMC meeting, has again seen the rupee under the pump, although the level of opprobrium being directed India’s way in the new year is somewhat less than that reserved for some other large emerging markets with current account deficits.
For now, the best that can be hoped for is that weak domestic demand slashes the import bill (already happening), exports improve (also underway) and some more big names follow Tesco with confidence boosting FDI announcements. All of these events would go some way to reducing the deficit financing challenge. That would give the RBI a protracted opportunity to refrain from policy tightening, which is what the domestic economy needs. There is a substantial caveat to that last point though – headline inflation is increasing again. While core wholesale prices remain low and stably so, food and other raw materials prices are again on the march, with pass-through of INR depreciation to tradables swift, and administered prices only going one way. The resulting whiff of stagflation is extremely unattractive to global debt investors.
FearfulSymmetry the Chart Pack Jan 2014