Ten factors that mattered most for Indian economy in 2015

The most decisive factor that guided the world economy in 2015 was the US Federal Reserve action. After the tapering drama, it was the rate hike; and as the world waited with bated breath for the employment numbers every month, markets were volatile as every action of US Federal Reserve Chair, Janet Yellen, was interpreted through the eyes of the rate hike. The shadow was long enough to be cast for 11 months and 16 days, which makes this institution occupy the tenth spot on the Billboard.

The Bank of China was not far behind at 9, with a decision to allow the Yuan to depreciate, and was defended as being ostensibly a correction, though the exports growth motivation was not missed. This added to currency volatility and it was widely expected that there would be competitive depreciation by other nations to protect their turfs. While this did not happen, China could not be ignored.

RBI takes the eight spot with interest rate action. The markets had to keep guessing what the RBI had in mind. Unchanged economic conditions invoked different responses thus keeping the market guessing. The RBI was critical of the transmission mechanism when it lowered rates but banks did not pick up the signals on lending.

And when they did, it was observed that bank credit growth did not pick up. The RBI kept reiterating that the market was savvier and the bond segment reacted with greater alacrity. But as banks kept lowering their base rates, the market spoke a different language with the 10 Years yield going back to the 7.7% plus range thus leaving everyone guessing whether the market is right or has missed the path somewhere. As part of the New Year eve bash, the RBI has brought in the concept of marginal cost of funds-based lending rate (MCLR) – there will be five of them! But banks still can charge their spread based on risk-perception. Will things really change?

At number 7 is the stock market which continues to occupy media space with various experts talking of the Sensex touching 30,000, with some pundits enhancing the peak to 33,000 by March. But the stock market struggled as nothing much happened on the economic front and was range bound at 25-26,000. This was the state after all the steps taken on the policy front. It appears that the market will never be satisfied. But then stock experts keep promising higher numbers because someone has to buy relentlessly to take it there. They now tell you that 35,000 will happen in 2016.

The sixth position is the inflation story in India. While government and RBI took credit for inflation coming down, fingers were pointed at everyone when the kharif pulses crop was sub-optimal. Hype was created on hoarding, but all the measures invoked did not quite work. After all if there are fewer stocks in the country, prices have to increase. As usual the imports came in late.

This ghost will haunt us for months through the CPI inflation rate. WPI inflation went into the negative zone, but still we are unhappy as corporates have lost their pricing power. RBI has to also keep interpreting these numbers once in two months to draw up their policy statements, and the interpretation has been variable, thus confusing the market. Hence, no one is happy with the inflation scene.

The Pay Commission’s recommendations occupy the fifth place. The number of Rs 1 lkh crore was to be the additional sum involved. Those critical of this number turned to examine the impact on the fiscal deficit, while the supporters spoke of the increased purchasing power in the economy. But if you sit back and calculate the actual money flowing in, it would be like this.

Around Rs 25-30000 crore will flow back to the government as taxes since almost all government employees are in this bracket of 20-30 percent. Another Rs 30,000 cr will be saved based on our marginal propensity to save being 30 percent of income. The balance will be available which is around Rs 40-45,000 crore. Therefore, the number is not big as it looks.

The fourth space is the investment mirage. The government has periodically assured us that it is spending a lot on infrastructure especially roads and railways which have been argued as being the future engines to growth. ‘Smart cities’ and ‘Make in India’ are the most often used terms in any seminar, but the allocations in the Budget are not matching these announcements. Stalled projects are only crawling as of now. It is not surprising that capital formation continues to decline.

The third spot is on the rural economy which is always the final argument for consumer spending. This season was to be the beginning of an elongated spending chain. But alas, the monsoon has played spoil sport leading to a lower kharif crop. This 14 percent share of GDP sector has always been relied on to drive industrial growth even though the equations are unequal when it comes to focus on investment in agriculture. Irony never misses us when there is a crisis.

The second position belongs to economists, analysts, CEOs and everyone else whose opinion matters. They are never happy. We wanted auctions of coal and telecom, which was satisfied. We wanted stalled projects to be passed, which was done. We wanted bankruptcy law and all other reforms which have all been accomplished. There was Digital India, Swach Bharat, Start-up India besides the Make in India and Smart Cities. But the economy remains where it was. Now we say the GST is a game changer, but we can be sure that once it is passed, the economic numbers will not change significantly and we will continue to ask for more.

Lastly, we have always taken pride that ours is the fastest growing economy in the world and there is a tinge of schadenfreude when we keep talking of how China has missed the bus and seriously argue whether we can take over China’s place as the driver of the world economy.

Can India take China’s place now is the content of several discussions. The situation turned recently with the Yuan becoming a part of the SDR. Have we missed something then in our hubris?

On this droll note, a happy new year to all readers.