An important issue is whether the investment cycle will turn, and so far there is no convincing evidence of this
After the destructive policy incoherence in 2012 and the self-inflicted macro pain, the coming year is likely to be slightly better for the Indian economy. The impact of the favourable policy actions since September on the real economy has been negligible. This should not be surprising. Financial markets are quick to discount future outcomes but on-the-ground reality takes longer to respond to the improvement in sentiment.
A low-level stabilisation in economic activity is already palpable. This should give way to marginal improvement in GDP growth, which is poised to improve to 6-6.5% in 2013-14 from an estimated 5.5% in 2012-13. Policy implementation remains the key, and the ball is very much in the government?s court: it needs to ensure that the constant drip of favourable sound bites is followed through with credible and concrete policy actions.
An important issue for 2013 will be whether the investment cycle turns around and by how much. To be sure, there is little convincing evidence of such a turnaround yet but the recent Cabinet sign-off on the Cabinet Committee on Investment (CCI), a high-powered body led by the Prime Minister to fast-track delayed projects, is a positive step. The ground-level success will be affected by state-specific issues but the CCI is still a welcome move to track project delays for timely action. However, the CCI should not be thought of as a panacea for all that is holding back investments.
Fiscal consolidation is an abused expression in India. The government has little fiscal credibility, and the lopsided fiscal-monetary mix is an outcome of its own misguided policies. Also, the manner in which a fiscal deficit target is achieved is as important as the numerical target. It is likely that the 2013-14 Budget in February 2013 will be the last complete Budget by the government before the next general elections. Thus, it is bound to rely on populism to which the government is hardwired. Even if the targets on paper appear realistic, slippage will almost certainly occur. The government will probably adopt a myopic view: it will deal with the additional fiscal stress from its populism if it is returned to power. However, if it is defeated, then the deficit is not its problem.
The introduction of cash transfers is an important step forward but it doesn?t change the populist orientation of a government. It also does not guarantee that politicians won?t misuse this new channel for political gain or that the savings from better targeting of welfare won?t be spent elsewhere.
The global demand backdrop is unlikely to offer a significant boost to India?s growth in 2013. An important global theme will be the disappointment over the anticipated growth profile, in my opinion. However, a positive outcome of this will be softer commodity prices, which, in turn, will cause lower inflation in India, although it will still remain high by India?s historical standards. RBI, which has already been easing by stealth, could cut the repo rate by around 100 bps in 2013. This will make India stand out compared to other countries in Asia, but don?t expect a quick growth turnaround as India?s economic convalescence will be slow and uneven even if the equity market is favourably affected by easy global liquidity.
Global risk-off and risk-on will play out frequently and the possibility of a stronger US dollar should not be ignored. The rupee remains the most misunderstood Asian currency, and remains in the doghouse despite chunk net FII equity inflow of $23.3 billion so far this calendar year. Most analysts and investors expect it to appreciate because of India?s shrinking current account deficit but I remain less sanguine than consensus on the rupee?s prospects. India?s high inflation differential and expectations of US dollar appreciation in 2013 will be the key headwinds for the rupee. It is likely to remain volatile, and the importance of high inflation affecting the real exchange rate shouldn?t be ignored.
The rupee is expected be in a wide R52-58/$ range and trade towards the weaker end by end-2013. Some more measures to attract overseas capital are possible. For a high-beta currency which is dependent on risk-driven capital inflows and also faces structural headwinds, rupee?s weakness is part of the solution, not part of the problem.
The author is senior economist at CLSA, Singapore. Views are personal (As told to Sunil Jain)
