NEW DELHI: India has hit the sweet spot again, with the underlying vibrant consumption coming to the fore as the economy bounces back from demonetisation, said Richard Iley, chief economist, emerging markets at BNP ParibasBSE 0.42 %.
With real GDP growth expected to average 8%, the country is a clear standout, said a BNP Paribas report that dwells extensively on “India’s sweet spot”.
“Last year’s good enough monsoon combined with just this natural buoyancy in incomes, which is being supported by the seventh pay commission. This means that India’s very solid if not strong consumption story remains very much intact,” Iley said in an interview to ET, while characterising demonetisation as a shock to the India story.
BJP’s victory in the critical UP election is icing on the cake for India, Iley said. “The scale of the victory surprised everybody … That sets up the realistic possibility of the NDA government retaining its majority in lower house in 2019 and likely to have a potentially workable majority in the upper house as well,” he said.
“Foreign investors are now assuming this will work to further embolden the prime minister and the government to press on with relatively high-risk structural reforms.” He said even the global environment has positive implications for India.
“Global growth and in turn world trade, on a number of matrix, actually looks the strongest it has now for at least six years, probably (since) the first half of 2011,” Iley said, pointing to a clutch of data from the US, commodity prices and freight rates.
“Critically, there are some very encouraging signs corporate animal spirits are reviving in the US and there is the potential, helped by the prospect of deregulation and tax reform by the Trump administration, we can see really strong upswing in capital spending by corporate America through this year,” Iley said, pitching it in the context of India, which has faced exports headwinds in its attempts to grow faster.
India’s exports rose 17.8% in February, the first double-digit growth in nearly three years of Narendra Modi government, validating the global revival pointed out by BNP Paribas.
The sharp rise in engineering goods exports hints there is spending recovery in the US and to some extent in the Europe as well, Iley said. The other problems for the economy such as non-performing assets are concentrated in the basic industrial sector, he said.
“Coal, iron ore, steel prices have kicked up very smartly over the last six to nine months. That’s an important solve, not a game changer but definitely a solve,” he said.
Meanwhile, falling oil prices, a game changer for the Indian economy, will continue to provide cushion, Iley said. “Upside risk to the oil prices and in turn downside risk to the Indian economy are pretty capped by the elasticity of the US oil supply and the very dynamics shale sector,” he said, pointing out that this is undermining OPEC’s attempts to push up oil prices.
BNP Paribas expects short-term prices to be capped at around $60 a barrel. “That’s essentially a tremendous source of comfort for the Indian economy,” Iley said, adding it also helps reduce inflation risks.
Inflation has bottomed out and there is risk of upside with a pickup to near 5%, but Iley said he sees no worry on that count. “Essentially under control… Inflation expectations have continued to pull back in RBI’s surveys… underscores RBI has been making the right policy decisions,” he said.
As for what next for India, Iley said there is a very standard shopping list. “Progress on land acquisition, which remains very difficult… labour reforms… a particular pet subject of mine is foreign direct investment,” he said. FDI is crucial to generate manufacturing jobs critical for India to have any hopes of creating employment needed to meet the enormous increase in labour supply.
This will make up for likely continued weakness in domestic capex cycle, Iley said, the real sour patch or the Achilles heel of the economy and there is no quick fix here. On the risk side, he said, there is still a lot of potential downside for the world economy from Trump administration’s policy agenda of increased protectionism and potential increase in border tariffs, which could push up the dollar.
However, even if those measures are coming, India is relatively insulated from those, Iley said. “Exports cycle is picking up. That is healthy for India but trade overall is much less important for India’s economy than many emerging markets,” he said.
What are the risks of government becoming more populist as 2019 election approaches, with schemes such as universal basic income? “The jury is clearly out. Certainly, I think the foreign investors are hoping that the scale of the UP victory will lead the administration to continue to prioritise the highrisk reforms,” he said.