The Indian stock markets have been going up recently on some reluctant economic reforms done by the Government. Note most of these piecemeal changes have not changed the downward trajectory of India’s economic growth. These cosmetic changes were done to appease the foreign investors who were threatening to leave India en masse. The lethargic and corruption ridden Indian government could not afford this given the massive fiscal and trade deficits. These reforms had encouraged analysts and some investors to mark this as a turning point for the economy. However the fact is that the Indian economy is mired in hopelessness and stagnation today.
Investment has come to a standstill as interest rates remain very high to compensate for the stubbornly high inflation; regulation continues to be a nightmare. While the fund managers want to pop champagne and goad investors bank into the equity market, 2 pieces of data contradict their bullishness. The industrial growth in the last 6 months has been anemic and inflation despite the record high interest rate remains at nearly 10%. The RBI has wisely not reduced the interest rates despite massive pressure from industrial lobbies and the government.
The Indian Government has recently come up with some economic reforms in the areas of Subsidies, Aviation, Retail and Power. However most of these reforms are half baked and fail to address the structural issues. Doubts are already being raised about how these changes are going to be implemented, with the ruling party losing the support of a crucial coalition partner. With elections just one and a half years away, it looks likely that the reforms will not meet their objectives.
The Electricity Companies in India have been facing major issues with regulations, corruption and fuel supply issues dogging them. Most private companies are making huge losses despite India facing a huge power deficit. Faulty government policies in the whole supply chain from fuel to equipment to generation is the major cause why despite massive unmet demand, the country’s power companies are losing money.
India will struggle to meet its already swollen deficit target this year after a dismal response to this week’s 2G auction and a battle to sell stakes in state companies, finance ministry officials privately concede.
Financial Express reported that India’s industrial production unexpectedly contracted by 0.4% in September, as manufacturing dried up and electricity generation tumbled, while a deceleration in capital goods segment for a 7 time in a row suggested continuing dismal investment climate.
However, this could dampen hopes of a significant recovery in the overall economic growth in the Q2 through September after modest expansion in August unless the services sector pitches in substantially. Industrial output accounts for roughly 19% of the GDP.
India’s inflation rate is still high, the RBI governor said on Friday, suggesting that the bank is unlikely to loosen monetary conditions anytime soon to support faltering growth, despite a slight easing in prices last month. The central bank has faced pressure from the government and industry to bring down the main policy rate from 8 percent, one of the highest in Asia, as the continent’s third-largest economy expands at its slowest pace in nearly a decade.