Over the last five years India experienced a sluggish economy with high inflation rate and declining employment. The second UPA government under Manmohan Singh was sclerotic, bumping from one scandal to another starting with the Commonwealth Games in 2010. This left the country, its people and its businesses with little hope and enormously frustrated by a corrupt environment, lagging job growth and a government incapable of providing services for its citizens. India therefore is emerging from its worst economic slowdown in a quarter-century and according to the Organisation for Economic Cooperation and Development (OECD) it needs big structural reforms to return to the eight-percent plus growth needed to generate jobs for its burgeoning young population. OECD left unchanged its 5.4 percent growth forecast for this financial year to March 30, 2015 – a figure broadly in line with government projections and up from 4.7 per cent expansion posted by India last year. But OECD revised upwards its forecast for next year, projecting Asia’s third largest economy will expand by 6.6 percent – compared with its 5.7 per cent estimate in May.
Mr Modi’s foreign policy moves have been marked by briskness. There is a new dynamism in bilateral ties in the neighbourhood – he made quick trips to Bhutan and Nepal early on; his first major foreign visit was to Japan, where he secured a $.33bn pledge from Prime Minister Shinzo Abe. In the past six months Mr Modi has made some dramatic international manoeuvres, including securing sizeable infrastructure funding commitments from Japan and China as well as establishing enhanced security arrangements with the United States.
Domestically, he moved forward on introducing land and labour reforms and with the drop in crude oil prices, he has been able to reduce fuel subsidies. This will further improve India’s investment environment and with the declining current account deficit he will have more room to take bolder reform measures.
Contrary to OECD’s revised focus I believe that at the end of this year the growth will hit 6%. The Wholesale Price Index (WPI) inflation declined to 2.38%, a five month low, due to the base effect. The Reserve Bank of India (RBI) reduced the Statutory Liquidity Ratio (SLR) by 50 basis points, giving banks greater freedom to lend.
In July end 2014, the foreign exchange reserve was USD 319.8 billion.The figure dropped to USD 314.6 as on December 5, 2014. The monthly average exchange rate of the Rupee as on December 5, 2014 was Rs 63.44 compared to Rs. 60.06 per USD.at the end of July 2014.
Indian markets reached historically high levels on 24th July 2014, with Sensex breaching the 26,000 level and closing at 26,271.85, and nifty breaching the 7800 level and closing at 7830.60.
Net Foreign Direct Investment was USD 2.4 billion in June 2014, compared to USD 1.8 billion in the previous period. In July 2014, the Foreign Investment Promotion Board (FIPB) approved fourteen proposals worth USD 254.48 million. Economic growth hit high during June, the highest in the past three years. According to Nomura, India is at the starting point of the pickup in the growth cycle. This action-oriented performance has unlocked, if not yet unleashed the bureaucratic blockades.
Manufacturing, which makes up nearly 15 per cent of the economy, expanded by 3.5 per cent in the three months ending in July, recovering from a 1.4 per cent annual contraction in the past quarter. The mining sector similarly expanded to 2.1 per cent. The highest growth rate during the last quarter was recorded by the financial services sector at 10.4 per cent. The construction sector expanded 4.8 per cent during the quarter up from 1.1 per cent growth in the earlier period. The auto, pharmaceutical and drug as well as garment making industries – all grew by 10%.
The Government has relaxed the norms for allowing foreign direct investment in many vital areas. The Foreign Investment Promotion Board will now be playing a much more active role in this regard. With the relaxation of the rules relating to FDI in the construction development sector it is expected that the move will boost affordable housing projects. Needless to say, investment opportunities abound in the country especially with a new found optimism and energy.
According to the National Council of Applied Economic Research (NCAER) the business confidence index showed an upward trend for the quarter ended June 2014 and this is continuing.
In the first six months of his term, Modi has focused on incremental measures like faster regulatory clearances to make it easier to do business. He has to tackle many structural reforms, such as the proposed general sales tax that will unify the market. He has energised the Government and launched a few laudable schemes including that of providing a bank account for every household in the country where only 40% have one. Also, an investor will now be allowed to exit on completion of a project or after three years from the date of final investment, whichever is earlier.
Despite the strongest election mandate in 30 years, Modi lacks a majority in the Rajya Sabha to get the approval for key bills. That has already delayed the proposed legislation to increase foreign direct investment limits in the insurance and pension sector. He also has to content with the cooperation of the States administration who have a mandate on issues such as land. Happily, despite the many odds, BJP has achieved a working majority in Haryana elections and is the single largest party in Maharashtra and is working in coalition with Shiv Sene.
Impediments which Modi’s Government is facing includes the weak monsoon which will impact agricultural growth which constitutes 14% of the economy and now the disaster caused by heavy floods in Jamu and Kashmir could also cost at least $.500 million in rehabilitation efforts.
Another critical issue for the Finance Minister, Arun Jaitley will be of working within the parameters governed by the Reserve Bank of India which has a mandatory role to play in the monetary policy.
Mr Modi’s most significant challenge will be providing the necessary skills to employ the one million people entering the work force every month for the next 15 years (more than 50 per cent of India’s population is under the age of 25).
India is home to the second largest highly paid expatriates in the world after China and ranked ninth by expatriates looking for a well-balanced, high-quality lifestyle according to a survey conducted by the Hong Kong and Shanghai Banking Corporation (HSBC).
