With the Indian economy stuck in a slow lane for over two years now, it is difficult to be optimistic about 2014. But we must also realise that there exists a cognitive bias in our forecasting ability, which psychologists refer to as the ‘recency effect’. We tend to forecast pessimism from a prevailing pessimistic scenario and the same holds for optimism as well. That makes pinning down a turning point extremely challenging.
I believe that the growth outlook for 2014 is set to improve, albeit modestly, from the current lows. A confluence of favourable developments such as continued progress on policy actions (like clearing projects, lifting ban on mining), good luck on monsoons and a widely anticipated improvement in global growth outlook can lift India’s GDP growth to 6%.
There are four things to watch out for in 2014:
Election and reforms: The outcome of the general elections will be critical to shaping India’s economic destiny. Political uncertainty is, therefore, a huge weight on the economy at this juncture. A decisive mandate can speed up the resolution of policy bottlenecks (a big drag on India’s growth), hasten pending reforms, improve private sector sentiment by sending a strong signal and lay the foundation for India’s entry into a phase of healthier growth.
Even with a fragile political outcome, I believe the reforms process that started about a year ago will not be reversed and will begin to bear fruit in 2014. These developments, in conjunction with the low base of last two years, can give a one-time boost to growth 2014-15.
The cost of a fragile mandate will be high over the medium run as we will not be able build on the mild upturn in 2014. The resulting ‘slow policy action’ and uncertainty can trap India in sub-par growth environment over the medium run. Elections, therefore, would be the most closely watched event of 2014.
Global growth outlook and QE: In an interconnected world, global developments matter more than ever. In addition to global recovery, other developments such as the quantum and speed of QE tapering have material influence on global liquidity and risk appetite and thereby flow of funds into India. Risks remain, but there is now some comfort on both fronts—global growth as well as impact of QE tapering.
Despite mixed developments, the IMF projects global growth to rise to 3.6% in 2014 from 2.9% in 2013. China has slowed after decades of double-digit expansion,