Indian Economy: Murphy’s Law at Work

Murphy’s law states that "Anything that can go wrong, will go wrong". This seems especially true in the context of Indian economy and Indian equity markets in the last one year. Last year this time, India was grappling with an imminent sovereign downgrade with an uncontrolled fiscal deficit, policy paralysis of the highest order with no economic reforms for eight long years and a weakening rupee. With Mr. Chidambaram coming back to the finance ministry, measures were announced to tackle the fiscal situation. We saw government spending being curtailed, FDI allowed in several sectors like Retail & Aviation and a more benign monetary policy.  Several policy measures were undertaken to cap fiscal deficit. The fuel price deregulation announce in January is probably the most significant reform measure in the last five years and will have significant positive long term impact on the economy. This combined with severe expenditure curtailment lead to a better than expected fiscal deficit number for FY13. With RBI easing monetary policy, it was expected that GDP growth will revive, although slowly, from the 5% levels of last year. And just when things seemed to be looking up, we had an 8% fall in rupee value through the month of May and June which changes the overall macro picture.

India is not alone in the currency carnage which was triggered, party, by US Federal Reserve’s comments on tapering on Quantitative easing. However, India is most vulnerable due to the high deficit levels on both fiscal and current account. RBI has been forced to intervene and carry out monetary tightening to defend the rupee. These monetary policy measures are going to slow down economic activity further and a recovery is now pushed back into 2014. We are now expecting a GDP growth of around 5% for the fiscal. Equity markets have reacted with banking and auto stocks taking a big hit. However, the broader market has been resilient with BSE Sensex with 5% of its all time high. We believe that all possible negatives which could happen have played out. One can add a fractured electoral outcome as another potential negative. However, no one is expecting very decisive mandate from elections next year so expectations are already low. There is not much that can go wrong from here. We have GDP growth, currency, Current account deficit, all at a decadal low. Things can only look up. Growth should get a boost once these temporary measures by RBI are withdrawn. We see more actions on the import side which will also help stabilize the rupee.

It’s difficult to see the sunshine when dark clouds gather. A good monsoon, commodity price correction, a strong macroeconomic recovery in US & a stable Euro area are significant positives for equity markets this year. We expect things to incrementally get better from here.