Business leaders and analysts are optimistic about what the new year has in store for India’s economy as they look forward to reforms from the government that would help transform the economic landscape.
“We foresee an improved economic outlook for the Indian economy this year,” says Vimal Bhandari, the managing director and chief executive of IndoStar Capital Finance in Mumbai.
“Going forward, policy reforms initiated by the government, lower commodity prices and a surge in investment activity will be the key triggers in propelling the economy on an upward trajectory.”
The IMF is forecasting that the country will continue to be the world’s fastest growing economy in the fiscal year from April 2016 to March 2017 with growth of 7.5 per cent, up from a predicted 7.3 per cent during the previous 12 months.
Businesses and investors are perhaps most eagerly awaiting the long-delayed introduction of the goods and services tax (GST), which would simplify the country’s convoluted tax regime and is expected to boost economic growth. The move would be one of the most significant economic reforms in its history, but the opposition Congress party has been doing its best to prevent it from being passed.
“Key pending legislations such as the GST bill needs to be passed at the earliest to usher in a uniform taxation structure in the country, which will boost trade and commerce activity,” says Mr Bhandari. “A key bill that also needs to be passed in the next parliament session is the bankruptcy bill, which would mitigate the insolvency problems of businesses and ensure a viable investment climate in the country by creating a proper survival mechanism or speedy liquidation of sick businesses.”
The economy showed signs of improvement last year after struggling in previous years with soaring inflation and gaping deficits.
“India might be entering an era of low inflation and higher real GDP growth, which is the most optimal economic scenario for any country,” says Varun Goel, a vice president at Motilal Oswal, an asset management company based in Mumbai. “The foundations for a strong economic upturn have been put in place.”
But “the expected upturn in economy will neither be quick nor even”, he warns.
“India’s economy is in better shape compared to the past few years,” says Mahesh Singhi, the founder and managing director of Singhi Advisors, a global investment banking firm in Mumbai. “A few positives that would be carried forward to 2016 are low inflation, current-account and fiscal deficits, prospects of interest rate fall and low oil prices. The government spending is slowly picking up and monsoon outlook for 2016 is also better than 2015. One negative is corporate earnings, which have been tepid, but we expect earnings to recover in the second half of 2016.”
Action by the prime minister Narendra Modi’s government to push through reforms will be “crucial”, he adds.
“Last year was a washout, as all of us waited for key reforms like GST and land bills could not be passed. It becomes very important for the government to pass these bills to reinsure investors’ confidence. It is also very important for private sector to start spending on capex [capital expenditure].”
But there remain hurdles too, as banks face pressures, which have a spillover effect on the wider economy, and with the rupee trading at weak levels.
“The biggest challenge is bank NPAs [non-performing assets], which are preventing them from lending to the infrastructure and real estate sectors. The banking sector has already 13 per cent of its assets under the stressed category. Another challenge is the depreciating rupee, which is hurting imports.”
The rupee could be poised to slide further this year, he says.
“China is going to devalue its currency, which will further devaluate the rupee. The US Federal Reserve may become aggressive in rate increases, which will further put pressure on the rupee. We think exporters are likely to benefit most in any of these cases.”
Foreign direct investment inflows into India are set to rise by 40 to 45 per cent this year, according to Amitabh Kant, the secretary of India’s department of industrial policy and promotion, the Press Trust of India news agency reported last week. FDI inflows between January and September stood at US$26.51 billion.
Despite the “dismal performance” of FDI and foreign institutional investors (FII) in the second quarter of the current financial year, Sunil Kumar Sinha, the principal economist and director of public finance at India Ratings and Research, a Fitch company, expects both FDI and FII to start picking up.
“Portfolio investments are expected to return after reallocation in early 2016, as India’s macro fundamentals and growth prospects are better,” he says. “Also, the focus on Make in India [campaign to boost manufacturing] will create longer and more stable opportunities for FDI.”
Babu Padmanabhan, the managing director of Steer, a materials technology company, says India should continue to develop its manufacturing capabilities this year as it strives to become a global manufacturing hub.
“This year looks extremely promising,” he says.
Pankaj Sharma, the head of equities at Equirus Securities, explains that there are a few major factors that will shape India’s business and investment environment this year.
“Credit growth and what happens on NPA situations for banks; the growth rate in agriculture, which is critically dependent on monsoons, after two successive failures; crude oil prices and the extent of slowdown in China; the Fed policy on rates; FDI trends and liquidity flow to emerging markets; and the fate of GST will all be main drivers,” said Pankaj Sharma.
Mohnish Sharma, the chief executive of Desta Global, which provides online marketplace farmers in India to improve their livelihood, says: “The business ecosystem will continue to change. While India is trying to climb the list of easiest places to conduct business in, we can safely assume that the government will be more buoyant with policies.”
Development of smart cities, energy reforms and tackling pollution should be among the primary focuses for the country this year, says Nischal Puri at Brandis India, a clothes manufacturer headquartered in Bangalore.
“While the macroeconomic indicators are looking much better, the key is to ensure that the growth and progress is inclusive, sustainable,” says Mr Puri.
The changing economic landscape could result in new trends when it comes to how Indians invest their money.
“As inflation comes down, there is going to be a big shift away from physical assets such as real estate and gold to financial assets like equities and fixed income,” says Mr Goel.
“In the past five years, Indian households had invested aggressively in physical assets as inflation remained high. This trend will reverse as inflation cools off and high real GDP growth leads to financial assets providing better returns.”
Murali Shankar, the vice president of the Association of Indian Forging Industry, explains that he hopes that much-needed infrastructure projects in India will gather pace this year.
“The government needs to provide financial institutions with additional regulatory powers to deal with rising NPAs, which threaten to derail economic progress and increase the burden on their loan books,” says Mr Bhandari.
“Impetus needs to be given to rapid development of infrastructure projects such as ports, roadways and rail networks to usher in increased connectivity, along with expediting key reform processes in the agricultural sector. The government also needs to work on a war footing to speed up the building of smart cities with the requisite modern-age amenities.”
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