News wrap: Cautious optimism on economic outlook

In a speech in New Delhi this week, Prime Minister Manmohan Singh predicted five percent growth for India in 2014. According to a report by the Hindu Business Line, Singh urged investors not to despair.

Singh expressed optimism that the economy is heading towards better days. “Our economic fundamentals remain strong. Our savings and investment rates are still over 30 per cent of our GDP and the entrepreneurial spirit in India is very much alive and kicking,” he said.

The Prime Minister also tried to dispel the environment of pessimism. “There is a perception in some quarters outside India that the country is losing its momentum of the past decade. This is also amplified by the political contestation here in India, which are inevitably louder in the election season that is now on the horizon. I wish to assure you that there is no reason to despair about our present or worry about our future,” he mentioned.

Singh highlighted various decisions taken to accelerate the implementation of mega infrastructure projects, reform tax administration, improve fiscal management, liberalise foreign direct investments and rationalise the system for allocation and utilisation of natural resources.

Many analysts have joined Singh in expecting a mild positive change for the economy in 2014, though predictions are tempered with uncertainty. A report in Livemint forecasts improvement, but emphasizes that a real turnaround won’t happen until after the elections.

The performance of companies in the three months ended December will be better than that in the preceding quarter, analysts say, although they are refraining from calling it a turnaround….That, they add, will happen after the elections.

Earnings should be marginally better than expectations,” said Rakesh Rawal, chief executive officer of private wealth management at Anand Rathi Financial Services Ltd, ascribing the improvement to a good monsoon and an “improvement in the economic scenario”. The result will be a gradual improvement because “the economy has still not recovered completely”, he added.

The Indian economy expanded at an average rate in excess of 8% in the seven years to 2011-12, but slowed to a 5% growth rate in 2012-13. Analysts expect it grow at the same rate, or marginally slower, in the year that will end on 31 March.

While most macroeconomic data has improved in recent months, it still hasn’t resulted in a turnaround, either in performance or sentiment….That will happen only after the elections that will most likely take place in April and May, said Rawal. That’s when there will be more clarity (in policy), he added, and companies will be more willing to commit capital expenditure. “The revival of the capex cycle could be the big driver for growth after the elections.”

An editorial in The Hindu takes a similar, cautiously hopeful tone, acknowledging challenges but characterizing India’s financial system as “resilient.”

The risks to the banking sector may have increased in the last six months, the growth impulse may still be weak, and a close watch may need to be kept on the level of non-performing assets of banks; but do not lose heart, for the financial system in India is still resilient.

The global financial system is now accustomed to high liquidity, and the upcoming squeeze as the U.S. tapers its bond-buying programme could prove disruptive. The problem for India will be magnified given the growth slowdown and high inflation, not to mention the uncertainty in the context of the coming general election.

The Times of India notes a survey which shows that business optimism is likely to improve in the first quarter of 2014 over 2013 levels.

Business optimism saw a significant rise in the first quarter of 2014 mainly on sales volume, net profit and new orders on the hope of better political stability.

"In fact, optimism in three segments, namely volume of sales, net profit and new orders, stands at an 11-quarter high for the period Jan-Mar 2014.  Hopes of greater political stability and accompanying certainty on the policy front could be partly responsible for the trigger in business sentiment," Dun & Bradstreet President and CEO, India, Kaushal Sampat said in a release issued here.

Installation of a stable government after the elections combined with policy moves to de-bottleneck large projects will help to counterbalance any possible impact from the Fed's decision to taper its monetary stimulus, he added.

The report found that around 78 per cent of the respondents expect an increase in profits during Q1 2014, while 17 per cent indicated they expect no change in net profits and 5 per cent expect their net profits to decline.

Writing in the Economic Times, Mythili Bhusnurmath outlines three major trends likely to impact the financial sector in 2014, while also acknowledging the major role elections have to play.

The biggest, of course, is “Fed tapering”. Not tapering per se but the pace at which the US Federal Reserve reduces its purchase of Treasury bills and mortgage-backed securities.

The next big thing to look forward to in 2014 is the report of the Monetary Policy Framework Committee. This could lead to a sea change in how monetary policy is formulated.

The third big event on the 2014 financial calendar is the issue of new bank licences.

So, in a scenario where the elections are going to impact every aspect of the economy, the best that a cautious practitioner of the dismal science can do is borrow a phrase from Yogi Berra, the US baseball coach famous for his one-liners and admit, “the future ain’t what it used to be”.