Can Modi govt defy global headwinds?

The April 2015 trade data and fourth quarter results of IT majors such as TCS and Infosys are stark reminder of the challenges that Modi government faces as its tries to take Indian economic growth trajectory back to the high of pre-2008 crisis. India's merchandise exports were down 14% in dollar terms last month- a fourth consecutive months of export contraction. IT exporters on the other hand reported one of their worst quarters in at least three years with single digit growth in revenues.This is bad news for India's growth ambitions as goods and services exports account for a quarter of the country's GDP and IT exporters are country's top earners of foreign exchange.

"For the first time in decades, world trade is growing slower than world GDP since 2012 indicating lack of global demand. It is tough for any economy to grow faster when the world demand is flat. External demand supplements internal demand and allowing the economy to grow faster," says Devendra Pant, economist and head public finance at India Ratings.

Indian exporters now also face challenge from the relative appreciation in the rupee against competing currency due to strong capital flows in last two years. This makes Indian stuff uncompetitive in many markets including
at home. This puts the onus on domestic demand to lift the economy.

"India is better placed than most emerging markets in this regard but a domestic demand driven economy will grow slower than one which can export as well," says Pant.

Domestic demand has been hit by fiscal austerity and stretched corporate balance sheets. "Unlike 2008 crisis government doesn't have fiscal space to push up demand growth additional spending. Nor is there a monetary space to cut interest rates aggressively as it could fuel inflation," says Sinha.

Corporates on the other hand are hamstrung by high leverage and low capacity utilisation of their existing capacity.

HSBC economist Stephen King yesterday published a weighty analysis titled “the world economy’s titanic problem” that pointed out that it has been six years since the trough of the last US recession.

“If history is any guide, we are probably now closer to the next one,” he said. Business cycles always turn, and after six years of growth, even at a pedestrian rate, the current recovery is old. One could make the same point about the UK, where the economic weather tends to follow that of the US, with a lag.

King’s point – which explains the Titanic reference – is that policymakers are out of lifeboats if a recession were to arrive. The US Fed has dealt with past recessions by cutting interest rates by at least five percentage points. That is obviously impossible today because rates are still on the floor.

truthbetold wrote:CD,

this is called clutching at the straws.  As I said before, some clueless guy writes something in some lefty paper, CD gets all exited and runs with that to post it here.
The fact is Indian economy has not rocketed yet to stratosphere as some market traders expected or wanted.  Economies like india does not take off in a day or a week or a month. It takes time , lot of time.  Lot of hurdles needed to be cleared off. Lot of mess created by UPA/sonia/Rahul needs to be cleaned.  

If Indian economy takes another whole year to reach a steady 7 to 8 %,  India is not going to be worse off. CD come back after Modi failed to improve the economy after 3 years.

truthbetold wrote:WTF has upa or modi govt have to do with IT exports?  This is a mature market and movean you give one example of a policy that modi govt did that negatively impacted IT exports?  Do not confuse people with unrelated events and throw mud at modi.  

Modi's govt is doing right things that are possible given their minority status in Rajya sabha. 

Modi screwed Andhra Pradesh. I am not happy about that. But his overall record is one of positive action given his govt's limitation in numbers in rajya sabha.  

UP, Bihar and WB carry alrge chunk of Indian population and they have not yet embarked on economic progress path (Nitish moved BIhar but it started from a very low economic base).  That is Modi's challenge. Not IT industry.

confuzzled dude wrote:

truthbetold wrote:CD,

this is called clutching at the straws.  As I said before, some clueless guy writes something in some lefty paper, CD gets all exited and runs with that to post it here.
The fact is Indian economy has not rocketed yet to stratosphere as some market traders expected or wanted.  Economies like india does not take off in a day or a week or a month. It takes time , lot of time.  Lot of hurdles needed to be cleared off. Lot of mess created by UPA/sonia/Rahul needs to be cleaned.  

If Indian economy takes another whole year to reach a steady 7 to 8 %,  India is not going to be worse off. CD come back after Modi failed to improve the economy after 3 years.

What is clueless about stating the facts & giving stats? IT exports have been shrinking for months compared last three years which are supposed to be the unproductive years of UPA's  two terms.

History shows that stocks will continue to rally indiscriminately after a reform-minded leader takes office, but after 12 months the market will start judging the record, rewarding reformers who deliver, punishing those who don't. For Modi, the judgment is in. The Indian stock market gained more than those of other emerging markets in his first six months. This year it's nearly given back all the outperformance dating back to late May of last year, when Modi assumed office.

All of us now face a different game, trying to figure out which disappointment Modi may follow, if he can't turn this around. Looking at the record, going back to 1990 for 25 world leaders who came to office as promising reformers, stocks rallied in their first year, rising 20 percentage points faster than the average for other stock markets. After 12 months, leaders who failed to deliver lost most of those gains. Those who delivered gained an additional 15 percentage points.

The promising leaders who delivered include South Korea's Kim Dae-jung, Erdogan, and even Vladimir Putin of Russia, another figure whose early reforms would later dissolve in increasingly autocratic behaviour. They hit the deck running with some big-bang reform. That set the agenda for the rest of their term. Those who failed to deliver by their second year included disappointments such as Joseph Estrada of the Philippines, and incomplete disappointments such as Junichiro Koizumi, who pushed to retire bad bank loans, but never achieved enough to jolt Japan out of stagnation.

Modi has pushed hard on some reforms, but they're seen as too incremental to satisfy hopes he could achieve what economists call an "intercept shift": A move onto a higher plane of double-digit growth, giving India a place among Asian miracles such as Japan, Taiwan and Korea. It's no secret a leader's honeymoon days are the most opportune time to push big reforms, which in India might have meant selling loss-making state companies, cutting subsidies or implementing an out-of-the-box idea that'd shake the status quo. Modi delivered nothing that big

The stats bureau compounded the problem, its magic tricks showing that India's economy is growing at a near-miracle speed of 8%. Modi used the data to show that India's growing faster than China, even if it doesn't feel that way on the ground. When China, Korea and even India were actually growing at 8%, the boom was obvious. Instead, India's largest 200 companies reported that sales and earnings growth fell into negative territory over the last quarter, after growing at a 15% average pace in five years since the global financial crisis, and a 30% pace in the boom years before the crisis.

The odds are now against India hitting a double-digit percent growth, because reform will be tougher. After the first year, a new leader's political capital typically decays, giving the opposition an opportunity to regroup, as Congress and the regional parties are doing.Still a sustained growth of 6% to 7% (based on true data) seems achievable.