The world’s currency and equity markets have expectedly cheered the US Fed Reserve’s decision to maintain the monetary stimulus programme keeping the tap open on ultra-cheap funds for a few more months. The BSE Sensex rose by 684 points on Thursday, while the rupee strengthened to 61.78 per dollar for the first time in a month. The prolongation of the stimulus package in the US couldn’t have come at a more opportune time for the Indian economy.
India’s gross domestic product (GDP) grew 4.4% during quarter to June 2013, its slowest pace since the Great Crash of 2008-09. Except for July, capital goods output have been mostly contracting in recent months -- a clear sign that firms were putting off capacity expansion plans. The decision to push back the move to bring down the curtains on the era of US-injected ultra-cheap money, will give India’s embattled policy makers the much-needed breathing space to plot a recovery, though it could be paved with short-term shocks.
The Indian industry, which contributes around a fifth of the GDP, is vital for the turnaround story to spin jobs and multiply income. Spending on television, refrigerators and cars continues to remain muted. This is quite unlike the earlier pre-poll crisis year of 2008-09 when consumer goods posted twice the growth rate of industry overall. This time, the option of windfall transfer payments to boost purchases isn’t available.
It is sometimes helpful to carve up the economy into two slices — the real and the financial sectors — and the developments in the latter, quite often, tell us what to expect in the former. In normal circumstances, it is safe to assume that a soaring equity market would imply that the economy is going through a purple patch. But, the current circumstances are not really normal.
Skyrocketing vegetable and onion prices have pushed up overall inflation levels beyond the comfort zone of the Reserve Bank of India. The currency may have recovered to a four-week high, but it is still more than 15% lower than what it was in May. Conceptually inflation may be an economic construct, but politicians always try and keep one eye on the price movements because an untamed inflation monster can have grave electoral implications.
While the newly set up Cabinet of Committee on Investment has taken the task of fast-tracking infrastructure projects in earnestness, slow project implementation remains a critical concern dogging the economy. The time for the realty sector to match the fireworks in the bourses may still be some distance away.