This result was warmly greeted as it was hoped that Modi would prove to be an active moderniser, able to eradicate corruption and cut through India’s infamous layers of bureaucratic red tape. The expectation was that India could then grow substantially and so deliver economic benefits to all, not just an elite few.
However, there was also an element of concern as the BJP had a history of perusing policies that in the past had created tension along religious and ethnic lines.
From the time of the election in 2014 until March 6 2015 the SENSEX advanced from 22,994.23 to 29,448.95, i.e. +28.07%. This 10-month window of optimism began to fade as by February 12 2016 the index was back down to 22,986.12, lower by 21.95%.
There has been a turnaround in the SENSEX as India was been described as
“...the only bright spot in a gloomy global economy...”
By Christine Lagarde, Managing Director of the IMF, and by close of business today the SENSEX was at 27,808.14 +20.98% from February 12.
Overall there is a renewed swagger about the SENSEX as the Indian economy is now growing at what is the fastest rate in the world.
The Indian economy expanded 7.9% YoY in Q1 2016. This was higher than a downwardly revised 7.2% growth in Q4 2015 and was in excess of market expectations of a 7.5% increase.
It is the best performance in six quarters as the farm sector rebounded and grew 2.3% and manufacturing jumped 9.3%. Considering full 2015/2016 year (April to March), the GDP in India advanced 7.6%, higher than 7.2% in the previous year.
Source: Ministry of Statistics and Programme Implementation (MOSPI)
The optimistic view is not so wildly felt within India as many are concerned about the state of the economy. Local press report that the data on income growth are under review as the changes made to reporting methods may have inflated the income data to suggest wages are rising by 10.3% in 2016.
The plans to reduce bureaucracy may not yield a net saving on government expenditure as on June 30 the cabinet gave its approval to an increase of at least 14.29% in salaries and pensions for 10 million government employees and pensioners. Increasing public sector pay does not equate with an efficient economy.
The hike may be smaller than previous increases but finance minister Arun Jaitley said the revisions will take retroactive effect from January 1, 2016. They will cost the exchequer nearly $17 billion in the fiscal year to end-March 2017. The federal budget has not fully accounted for this sum so leading to concern the government will miss its deficit target in case of a full rollout this year. Naturally, Jaitley downplayed these fears.
Why then, is there a disconnect between GDP and wage growth and data for other indicators that should also be going up?
The Reserve Bank of India reported that foreign direct investment (FDI) in India increased by $2.092bn in April of 2016, down from $4.413bn in January, and $5.035bn on October 2015.
Investment rates have been falling for several years now and freight volumes and other indicators like electricity generation remain subdued. Agriculture, (the livelihood of more than half the population) has been hit hard by consecutive droughts and a severe decline in the conditions of production and sale of crops.
Exports from India fell 0.79% YoY to $22.2bn in May of 2016 and while this was the least decline in 18 months. Exports have been falling and imports to India dropped 13.2% YoY $28.4bn in May of 2016.
The concerns are to be seen in that the growth numbers appear to be at odds with idle factories, sagging exports and poorly performing banks.
Business confidence has fallen to 53.90 in Q4 2015 from 56.4 at the start of 2015. Manufacturing Production in India increased 0.70% in May of 2016, just the second positive reading in the past seven months.
Indian banks' loans rose 9.4% in the two weeks to June 24th 2016, however, this is down from 11.6% at the start of this year.
Policy ...an optical illusion
The concerns highlighted above are pressing as it is felt that the current economic agenda is built on policies that appear the optical effect that foreigners will see as against really enforcing bold change from overseas.
To this extent there appears to be much fanfare and yet little gritty reality. As an example, the “Swacchh Bharat Abhiyaan” or “Clean India Campaign” has been accompanied by a reduction in the allocated funds from central government for sanitation and clean drinking water.
The “Smart Cities” programme identified 100 cities that are supposed to benefit, however, where is the strategic implementation of plans that can deliver significant changes.
Finally, the “Make in India” scheme was based on government invitations to foreign investors to set up exporting industries within the country as a catalyst to fire private investment. But when external investors see India’s own big industrialists hardly investing anything at home themselves the incentive is minimal.
It would be tempting to say that the SENSEX may be looking somewhat toppy, given that the Indian economy cannot be simply treated as an unblemished growth hot spot until the domestic polices lift all in society and economic growth is put on a more sustainable and equitable footing. However, right now it has a positive technical aspect and momentum. I cannot advocate jumping off the rally in the near term as 29,000 is looking a distinct possibility.
– Edited by Clare MacCarthy
Stephen Pope is managing partner at Spotlight Ideas