India is in a mess at present, a mess that will take at least two more years to clean up (only partially). The gain to savers investing in equity and debt lies in cleaning up of the mess. However, the cleaning up process will cause pain, which is being felt by everyone, from investors to the general public. Unfortunately, there is no gain before pain and one has to bear the pain for a while to reap the benefits.
India’s mess is there for everyone to see. In economic terms, falling growth, high inflation, high fiscal and current account deficit and weak capital markets are the reality. In real terms, inadequate infrastructure and lack of employment opportunities characterise the issues faced by the general public. Other issues the country faces include corruption, law and order and coalition politics. It is easy to blame the government for this mess but the fact is that everyone from the person jumping the traffic signal to the corporate that leveraged itself for growth is to blame.
On the economic front, the numbers say it all. Growth is at a decade low of 5 percent, consumer price inflation at about 10.5 percent, fiscal deficit at 5.2 percent of GDP, current account deficit at record highs of 6.7 percent of GDP (third quarter 2012-13), the Sensex and Nifty off the highs seen in late 2007 and government bond yields have remained unchanged over the last two years.
Infrastructure troubles are felt by everyone. Water and power shortages are rampant in most parts of the country. Falling economic growth is being felt in the labor market with employment opportunities dwindling across sectors. Media nowadays is only about scams and law and order issues in the country while mid-term elections are not ruled out given the current political situation in the country.
The mess is not going to get resolved soon. So, where is the bright spot and why should savers be optimistic on the mess being cleaned up? The answer lies in the fact that since the mess is there for everyone to see, there is some efforts to clean up the mess. On the economic front, the government’s clear focus is on lowering the fiscal deficit, which is projected at 4.8 percent of GDP for 2013-14 and even lower for the next fiscal year.
The path to achieve a lower fiscal deficit may be questioned as spending on capacity creation is affected. But the fact is the government’s spending has leakages and that is the primary reason for inflation as well as high current account deficit. In a sense, less involvement of the government in the economy as it cuts down spending is good and this should bear fruit going forward.
In the real economy, infrastructure is not going to come up overnight but given constrained resources, there will be prioritising of infrastructure spending and rationalisation of policies to improve private participation. Labor markets are not going to improve in a hurry given current growth levels but outlook will be brighter as the economy comes out of a slump. The fact that media is highlighting issues of corruption and law and order is forcing the government to sit up and take remedial measures. Mid-term elections would be welcome as a new government can then take more concrete measures to clean up the mess the country is in.
Equity and bond markets usually front run future growth prospects. If the economy is being set on the right path, there are good returns ahead for the markets. The risk, of course, is that the mess is not cleaned up and there is further mess ahead. The latter scenario is for pessimists but given the fact that from such deep mess the only way ahead is to slowly come out of it, it is better to be an optimist in this environment.