Bumpy Ride Ahead for Economy as Inflation Accelerates

Rising well above the Reserve Bank of India’s (RBI) medium-term inflation target of 4 per cent, retail inflation accelerated to a 15-month high in November amid the ongoing seasonal surge in vegetable prices and an unfavourable base effect from last year.

According to Central Statistics Office (CSO) data released, retail inflation accelerated to 4.88 per cent in November over the same month last year. CPI Inflation in October had stood at 3.58 per cent, while it was at 3.28 percent in September.

As per the data, the surge in inflation was led by a 22.5 per cent rise in the prices of vegetables. Higher vegetable prices have kept India’s inflation on the rise since July, after hitting an all-time low. Rising oil put further pressure on inflation. Brent crude prices increased 9.1 per cent month-on-month during November. According to analysts, this has affected fuel inflation and spilled over to the transport category.

Adding to the economic woes, the industrial output hit a three month low as it continued to witness a negative trend and fell 2.2 per cent on annual basis in October.

Data showed that subdued performance of mining and manufacturing sectors coupled with a contraction in output of consumer durable weighed on the industrial output. This shows that the turnaround in investment and demand is yet to resume in earnest. The same data last year registered a positive trend of 4.2 per cent. The alarming figures come in the aftermath of the slowed GDP figures earlier this year.

Headline inflation has already breached the central bank’s revised forecast that consumer prices will range between 4.3-4.7 per cent for the rest of the current fiscal. The RBI had held interest rates steady during its December monetary policy warning of upside risks to inflation and marginally increasing its estimates. The central bank noted that the moderation in core inflation, which excludes food and fuel prices, seen in the first quarter, has now reversed. As per Economists, RBI is likely to hit the pause button on interest rates for the remainder of the current fiscal.

Further, the impact of the reduction in GST rates on a number of items may pass through into retail prices and inflation in the coming weeks. However, the continued impact of the HRA revision on housing inflation and elevated fuel prices suggest that the CPI inflation is likely to be in a range of 4.4-4.7 per cent in the remainder of FY2018.

Latin Manharlal Group

Nov Manufacturing Improves as Note Ban & GST Impact Fades

India’s manufacturing activity has shrugged off note ban and GST worries as the factory activity quickened in November at the fastest pace since the government’s surprise cash clampdown late last year, indicating that the economy is strengthening in the third quarter.

According to a Markit Economics report,Nikkei India Manufacturing Purchasing Managers Index,a gauge measuring activity in the manufacturing sector surged to 52.6 in November from 50.3 in October, with a reading above 50 signaling expansion.

The upsurge in the headline index was driven by a marked increase in output on account of higher order book volumes and a fall in tax rates under the Goods and Services Tax regime. A new orders sub-index bounced back into expansionary territory to 54.2 in November from 49.9 the month before.

Moreover, stronger factory production levels translated into the fastest rate of employment creation since September 2012. Besides, export growth rose for the first time in three months as overseas demand for Indian goods improved. On the price front, input cost inflation quickened to the fastest since April, but firms were unable to fully pass on higher cost burdens to price-sensitive clients. The findings add to evidence that a recovery in Asia’s third-largest economy is on track.

The manufacturing sector had been hit hard by the government's move to scrap some high-value notes in November last year, while implementation issues linked to the GST had hurt businesses. The sharp cut in GST rates for more than 200 items had also helped boost sentiment in the sector.

Improved manufacturing activity reinforces the revival in India's gross domestic product growth. The recent GDP data showed that the economy reversed five quarters of slowdowns to post 6.3 per cent growth in the July-September quarter compared with a three-year low of 5.7 per cent in the previous quarter.

While there are some weak spots in the manufacturing sector and overall economy, the data however now points that economy seems to have weathered the transitional challenges experienced earlier in the year and appears poised for a durable recovery going forward.

Latin Manharlal

Moody’s Gives Thumbs Up to Indian Economy

Overlooking a haze of short-term economic uncertainties and pinning faith in the continued progress on economic and institutional reforms, Moody’s Investor Services has upgraded India’s sovereign rating, citing that the reforms will improve the business climate in the country and raise productivity.

Global ratings agency, Moody's Investors Service has raised India’s sovereign rating for the first time since 2004, from the lowest investment grade of Baa3 to Baa2, changing the outlook from stable to positive.

Moody’s decision comes as an appreciation for Prime Minister Narendra Modi’s government and the reforms it has pushed through. It comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings. With the ground paved for institutional players from around the globe to not only pump in money but also set up shops, India’s stature in the international arena is bound to rise further.

Moody’s praised Modi’s efforts to broaden the tax base and tackle non-performing loans in India’s $2.3 trillion economy, Asia’s third-largest. The rating agency also hailed introduction of the GST, a landmark reform that turned India's 29 states into a single customs union for the first time and expects that it will promote productivity by removing barriers to interstate trade.

The upgrade adds to a string of good news for Modi. With this rating upgrade, the cost of capital will reduce and more FDI is expected to flow in, as certain investors don't invest in countries rated below Baa3.

While Moody’s acknowledged that the impact of these measures will take time to reflect, and some, such as the GST and demonetisation, have undermined growth, it expects real GDP growth to moderate to 6.7 per cent in the financial year ending in March 2018, with a pick up to 7.5 percent in the following year and similarly robust levels from 2019 onward.

However, the government's debt is a cause for concern, noted Moody's - with the debt to GDP ratio at 66 per cent in 2016 against a comfort level of 44 per cent in this particular rating category. This could severely hamper the government's ability to take any more debt for infrastructure projects, relying instead on issuing bonds, which may find greater acceptability due to the ratings upgrade.

Nevertheless, as disruption fades Indian economy is expected to register robust levels of growth. Stronger consumption and fiscal reforms are expected to improve business confidence and investment confidence in the country.

Latin Manharlal Group

Bank Recapitalization To Help PSBs Find Their Feet Again

At a time when the stock markets are surging to new highs every other day, there was very little to cheer for the banking sector, mainly for the public-sector banks burdened with ballooning Non-performing assets (NPA), which resulted in low loan book growth. Amidst this situation, the NDA government has come up with a big bang bank recapitalization, announcing massive infusion to perk up PSU banks.

On October 24, the government announced a huge infusion of funds into state-owned banks. The recapitalisation package, amounting to Rs 2.1 lakh crore (the size of 1.3 per cent of the country’s GDP), included Rs 1.35 lakh crore via bank recapitalisation bonds to be issued to public sector banks and Rs 76,000 crore from budgetary support and market loans.

The Rs 2.11 lakh crore capital infusion into the banking sector will come over the next two years. It will come in three parts. The government itself will directly pay banks Rs 18,000 crore by buying their shares. It will also encourage banks to raise Rs 58,000 crore from the market, so there’s a 75-25 government-private infusion of new money into banks.

By injecting capital, the government is trying to partially improve the balance sheets of public sector banks, which could pave the way for them to be sold. This will also assist banks to write off some of the whopping Rs 10 lakh crore bad loans currently on their books.

As per economists, the package will help public sector banks to accelerate provisioning for stressed assets, speed up the NPA resolution process and support the clean-up of balance sheets. Moreover, it will help these banks focus on reviving credit growth. Recapitalisation will arm banks with enough capital to lend, as and when the economy rebounds.

From an economic perspective, the reach and distribution of PSU banks is very critical thus making it an important source of funding for the large section of the economy as evident by their dominant market share. Once banks are adequately capitalised, an important requirement to fund faster economic growth will be in place. In this way, this announcement sets the stage for an economic revival.

However, the economic recovery depends on number of factors. Business confidence is at an all time low and private investment too has been on a downward slide. Excluding for roads, there haven’t been many avenues of growth in government spending in infrastructure. Having said that, banks remain the heart of the financial system in India and their capitalization is critical for savings mobilization, credit offtake and revival of investment demand over the medium term. 

Going forward, the recapitalisation move coupled with other structural reforms such as bankruptcy code, Goods and Services Tax, RERA and Direct Benefit Transfer would set the base for re-acceleration of India’s growth momentum over the medium term.

Latin Manharlal Group

RBI Presses Pause Button; Lowers Growth Forecast

Citing upside risks to inflation, the central bank has refrained from changing key lending rates and maintained a neutral stance, suggesting that any further rate cuts are not a given.

The Reserve Bank of India's monetary policy committee (MPC) in its fourth Bi-monthly policy review kept the key repo rate unchanged at 6.00 per cent and the reverse repo rate unchanged at 5.75 per cent. However, the statutory liquidity ratio (SLR) was cut by 50 basis points to 19.5 per cent, effective fortnight starting October 14.

The MPC observed that retail inflation has risen by around two percentage points since its last meeting in August amid an escalation of global geopolitical uncertainty and heightened volatility in financial markets. RBI expects inflation to surge from its current level and range between 4.2-4.6 per cent in the second half of this year.

Going forward, the central bank has revised its gross value-added (GVA) growth forecast to 6.7 per cent for the current fiscal year from 7.3 per cent earlier. RBI said the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif food grains production are early setbacks that impart a downside to the outlook. The central bank noted goods and service tax implementation seems to have an adverse impact as it made prospects of the manufacturing sector uncertain which may further delay investment revival.

As economic growth has been slowing for five quarters, the pressure is building on the government to announce a stimulus package to spur growth. India’s real or inflation-adjusted gross domestic product grew 5.7 percent in April-June, the slowest in 13 quarters. RBI suggests that for improving economic growth, deleveraging of balance sheets and recapitalisation of banks was essential.

The central bank will continue to watch the inflation trajectory for months before taking a call on the next rate cut which can only happen if growth drops much below its annual projection. Even a drop in the second quarter may not move the central bank to act as it may like to wait and watch at least till the December quarter growth figures are out.

Latin Manharlal Group

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Indian Economy Losing Steam Amid Soft IIP Numbers and Rising Inflation

The challenges for Indian economy seems to be mounting as data on the Index of Industrial Production (IIP) and consumer price index (CPI)-based inflation comes as bad news for the Narendra Modi government, with a clearer evidence of slowdown after growth of gross domestic product (GDP) crashed to its lowest last week.

The IIP data shows that it has grown by only 1.2 per cent, while it grew at 4.5 per cent in the same month last year, signaling that the industrial activity and manufacturing are still reeling under the impact of demonetisation and Goods and Services Tax (GST).

Adding to the woes, August's consumer price index inflation shot up to a five-month high at 3.36 per cent from 2.36 per cent in July, dampening chances of a rate cut by the central bank. According to economists, rise in inflation for two straight months has reduced the chances of another rate cut by the RBI in a policy review next month, which has a central inflation target of 4 per cent. Last month, the RBI had cut its key lending rate by 25 basis points to 6 per cent in view of softening inflation.

The GST rollout has caused many problems within the manufacturing sector, and reports suggest that the fall in IIP in June, mostly part of the formal economy, was because of pre-GST stocking. But the continued low rate of IIP in July showed that industrial recovery impacted by GST and demonetisation within eight months of each other is suffering under the weight of both the decisions.

However, the silver lining is that economists expect industrial recovery to gain momentum as the GST stabilises. 

Considering the inflation numbers, the GST has also made some services, such as health, transportation and communication, recreation and amusement, inflationary. Further, a surge in house rent allowance (HRA) for central government employees also pushed up inflation in rent to 5.58 per cent in August from 4.98 per cent in the previous month. Even when volatile inflation in food and petroleum is taken out, the resultant core inflation rose to 4.5 per cent in August, from 3.9 per cent in the previous month. However, economists are not perceiving inflation as a threat and expect it to remain in the targeted 4 per cent range. 

Latin Manharlal Group

Ease of Doing Business: Still a Long Way To Go

The efforts taken by National Democratic Alliance (NDA) to ease the regulatory environment notwithstanding, the perception of most business enterprises is that little has changed on the ground.

This comes as a wake-up call to the government and a reminder that the legacy of red tape is far more tough to undo than what has been thought so far. The study also reveals that the experience of regulatory reform has not been uniform across the country.

A survey by NITI Aayog and Mumbai based think tank IDFC institute of formal Indian manufacturing firms, has found that, as of the 2016 reforms by the NDA government, factory-owners largely do not feel things had changed excessively.

The results exhibited that for a majority of respondents, parameters such as setting up a business, land and construction, environment, labour, water and sanitation, taxes, and access to finance remained the same compared with a year ago; on legal matters, they reported that things had deteriorated. The survey was conducted in 2016. Last year, the World Bank’s Ease of Doing Business Ranking placed India at a lowly 130 out of 150 countries.

The Niti study has surveyed over 3,000 manufacturing firms all over the country, while the World Bank survey is focused mainly on Delhi and Mumbai, and involves surveying expert opinion to form global rankings.

According to the Niti survey, on an average it took enterprises about two years to resolve a legal dispute and there is wide disparity across states. On an average, companies witnessed around 46 hours of power shortage in a typical month. It took firms 118 days to set up a business. The World Bank's Doing Business survey shows that it takes 26 days to set up a business but this is restricted to Delhi and Mumbai.

Further, the awareness among the firms of government’s actions to improve the business climate is surprisingly low. As per the survey, only 20 per cent of the firms surveyed informed about using single-window systems for setting up a business. A majority of well-established firms nearly 59 per cent didn’t even know of this tool, which greatly eases compliance burden.

However, the study suggests that in labour-intensive sectors like textile, apparel and footwear, more flexible labour laws can aid in scaling up to meet order demand. Improved information to entrepreneurs about “single-window” approvals in states can improve matters. As would better availability of power and finance, especially in poorer states. Undoubtedly, the ease of doing business can be much improved.

Latin Manharlal Group

Uncertain Fiscal Outlook to Undermine India’s Growth Hopes

There seems to be trouble brewing for Asia’s third biggest economy as fiscal slippages could be a drag on the country in the year to March 2018, with outlook for current financial year turning more somber.

According to Economic Survey Part-II released, the country is facing an uncertain fiscal outlook going forward and this would make it difficult in achieving higher end of the 6.75-7.5 per cent GDP growth estimated earlier.

The downside risks to growth and fiscal outlook of the Indian economy are piling up in the form of deflationary impulses like farm loan waivers, stressed farm revenues, as non-cereal food prices have declined and declining profitability in the power and telecommunication sectors, further worsening the Twin Balance Sheet (TBS) problem. However, it remains upbeat on meeting the fiscal deficit target, according to the second part of Economic Survey.

The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.

Owing to the gradual fiscal consolidation path chalked out in Union Budget for 2017-18, the fiscal deficit is expected to come down to 3.2 per cent of GDP during 2017-2018. After reaching this milestone, the fiscal deficit target of 3 per cent of GDP under the FRBM framework is likely to be achieved in 2018-19.

The mid-year survey also called for interest rates to be lowered even further as India struggles with subdued private sector investment and a banking sector coping with rising non-performing assets. 

Moving ahead, the government needs to convince the central bank to slash rates further, by pushing policy measures to keep inflation under control. With inflation dipping to 1.5 per cent in June, weak demand has been a serious concern. According to the repot, inflation is projected to remain below the medium-term target of 4 per cent.

Latin Manharlal Group

Uptick in Business Confidence Lifts India’s Economic Outlook

With Indian economic activity gathering pace this year, India’s business confidence has improved underpinning the hope that the reform initiatives of the government would unravel a host of investment opportunities for firms going forward.

According to the Grant Thornton International Business Report (IBR) survey, India’s ranking has surged from 4th to 2nd position on the optimism index in the second quarter of 2017.

The uptick in business outlook has been attributed to the continued reforms coupled with expectations of higher economic growth. The implementation of Goods and Service Tax (GST) has further contributed to optimism. GST is expected to contribute to productivity gains and a higher GDP growth by improving the ease of doing business, unifying the national market and boosting India’s attractiveness as a foreign investment destination.

According to the report, 94 per cent Indian businesses have faith in India's economic growth story. India also topped the chart on the ranking for revenue expectations with 78 per cent of the businesses in the country expecting an increase.

Meanwhile, on profitability index, 69 per cent of the respondents expect higher profitability, thus, bringing India on the 2nd rank on the chart from 6th position in the last quarter.

Strong reform measures and political stability has led to improved business sentiment towards India. The trend is further expected to continue in the longer-term, filtering through to corporate earnings.

India continues to stand out as the one economy which has huge potential to continue to grow and this is reflected in the survey where Indian businesses are most optimistic and high on expectations of increasing revenue, employment, profitability.

While India continues to rise on the optimism index, China is still lagging with only 48 per cent businesses displaying confidence in its economic growth for the second consecutive quarter.

Globally, companies are positive on business prospects with an all-time quarterly high of 51 per cent in Q2, making it the fifth consecutive quarter of optimism. Companies in the US, European Union and China are more confident with 81 per cent, 50 per cent and 48 per cent, respectively, businesses optimistic on future prospects.

Latin Manharlal Group

Cooling Inflation Bolsters Rate Cut Hopes

India’s consumer price inflation has eased to its slowest pace in more than five years, raising demands for the interest rate cut by the Reserve Bank of India (RBI) at its policy meet scheduled in August, in order to stimulate growth in Asia’s third biggest economy.

According to Central Statistics Office (CSO) data released, consumer inflation eased to a record low of 1.53 per cent in June from 2.18 per cent in May. It was 5.77 per cent during the corresponding period last year.

With inflation number below the RBI’s mid-term target of 4 per cent for the past eight months, industry participants and the government are batting for a cut in interest rates to support economic expansion. The central bank now expects retail inflation to come in a 2.0-3.5 per cent range for the first half of FY 18 and 3.5-4.5 per cent in the second half, down from 4.5 per cent and 5.0 per cent, respectively.

Deflation in vegetables and pulses continues to bring down the headline numbers as food and beverage price index, which accounts for 45 per cent of the consumer price index basket, contracted 1.17 per cent in June. Vegetables prices slipped 16.53 per cent during the reporting month from last year, while price of pulses declined nearly 22 per cent. Analysts expect these prices to remain subdued for few more months aided by an excess supply, good monsoons and low prices globally.

On the other hand, industrial output rose 1.7 per cent in May after rising 3.1 per cent in April owing to weaker performances in manufacturing, mining and power generation. The tepid factory output data could further strengthen the case for RBI rate cut in August to support India's economy, which grew 6.1 per cent in the January-March quarter, its weakest pace in more than two years.

While the recent data may put pressure on RBI to consider a token 25 basis point rate-cut, it is not a given. Monsoons, HRA increase under the Seventh Pay Commission, temporary impact of GST, base effect trickling in, and fiscal risks coming from farm loan waivers by States can still exert upside pressure on inflation in the second half of this fiscal.

Latin Manharlal Group

GST Rollout to Support India’s Growth Story

After a long wait of 17 years, the goods and services tax (GST) is all set to become a reality from the midnight of June 30.  GST is expected to provide the much-needed stimulant for the economic growth in India by transforming the existing base of indirect taxation towards the free flow of goods and services.

GST is the indirect tax reform that will replace several taxes levied by the central and state governments and change India into a single common market with a unified tax structure. It was introduced as the Constitution (122nd Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill. Under GST umbrella, goods and services will be taxed at 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent.

GST, a uniform, indirect tax regime, will no doubt benefit the industrial class by improving the ease of doing business. Integration of current multiple taxes into single GST will reduce cost of tax compliance and transaction cost. GST will also remove cascading effect of taxes imbedded in cost of production of goods and services.

According to economists, lower GST rates may lead to a decline in inflation, however, the economic growth may not improve significantly in the short term even though it will benefit both India Inc and the government in the medium term. However, GST, which will be rolled out in July, will help raise India's medium-term growth to above 8 per cent, as it will enhance production and the movement of goods and services across Indian states.

With the implementation of GST, the flow of Foreign Direct Investments (FDI) may rise as the existing multiple tax laws are one of the reasons foreign companies are wary of coming to India.

In addition, India’s overall revenue is also expected to shoot up by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth.

GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production that incudes land labour and capital.

The introduction of the Goods and Services Tax will be a very noteworthy step in the field of indirect tax reforms in India. The GST, because of its transparent character, will be easier to administer. The proposed taxation system holds great promise in terms of sustaining growth for the Indian economy.

Latin Manharlal Group

Record Low Inflation in May Spurs Rate Cut Hopes by RBI

India’s retail inflation gauge slumped further in May, hitting a record low amid a sharp drop in kitchen staples, leaving lingering doubts about whether the Reserve Bank of India (RBI) tightened its monetary policy stance too early.

According to the data released by the statistics office, consumer inflation, the benchmark price gauge of the RBI, eased to a record low of 2.18 per cent in May from 2.99 per cent in April. It was 5.76 per cent during the corresponding period last year.

The data would confirm expectations that inflation is running well below the central bank's estimates, adding pressure on the RBI to reduce interest rates during its next policy meeting in August to boost economic growth.

The RBI last week kept the benchmark repurchase rate unchanged at 6.25 per cent in a policy review and slashed its inflation forecasts, acknowledging that price pressures were weaker-than-anticipated, but declined to ease its 'neutral' policy stance amid concerns that inflation may rebound and move close to its 4 per cent medium-term target by the end of the year.

Asia’s third-largest economy is facing a decline in inflation amid cooling food prices. The consumer food price index declined 1.05 per cent in May, compared to a year ago period, led by an almost 20 per cent fall in the prices of pulses and products. Price of vegetables too fell 13.4 per cent from a year ago.

Further, India's wholesale prices also cooled in May. WPI inflation in May was 2.17 per cent compared with 3.85 per cent in April. Similar to retail inflation, the drop in the wholesale inflation is attributed to easing food prices.

Going forward, a good monsoon is expected to keep a lid on food prices and overall inflation, which may force RBI to shift its attention to growth. India's GDP growth slipped to 6.1 per cent in quarter ended March, the lowest in more than two years, as the economy struggled with the effects of November's demonetisation. 

Latin Manharlal

Indian Markets on a Roll Amid Improving Sentiments

The euphoria in the Indian equity markets seems to be gaining strength day by day as the equity benchmarks continue to scale new lifetime highs. Buoyed by encouraging corporate earnings and a string of government reforms, including NPA resolution and steel policy, domestic markets are in no mood to look back.

The two prominent Indian market indices, the benchmark 30-share Sensex index and the Nifty 50 index, scaled record highs on 26th May, 2017. Stock benchmarks soared almost 1 per cent to all-time highs with the Sensex closing above 31000 and Nifty touching 9600 for the first time.

Sentiments of investors remained upbeat on a sustained pick-up in the economy and corporate earnings, backed by reforms such as the goods and services tax (GST) and tackling of bad loans. The governing Narendra Modi-led Bharatiya Janata Party (BJP)’s smart victory in the 2017 Uttar Pradesh assembly elections has raised the probability that it could come back to rule at the centre for the second term, further boosting the investors sentiments.

Meanwhile, continuous purchase by domestic institutions has kept the momentum going. Adding to this, the fact that other forms of investments such as property and gold have not provided adequate returns, have also made equities look more attractive in the year 2017.

The Indian markets are also relieved by the timely arrival of the southwest monsoons. Analyst pointed out that FMCG heavyweights such as Hindustan Unilever and ITC got a boost after the India Meteorological Department (IMD) predicted the timely arrival of the southwest monsoon rains.

Positive global cues also played a vital role in the D-street clocking 31-k mark, after the Federal Reserve’s latest meeting showed that the policymakers were cautious about a fresh rate hike. According to the minutes of the May 2-3 meeting, the Fed members decided that they should hold off an interest rate hike until they were confident the recent US economic slowdown was temporary.

Going forward, the outlook for the coming months looks promising and the Indian markets are expected to strengthen further with the indices expected to clock new highs in the current fiscal as the macroeconomic backdrop remains favorable. 

Latin Manharlal Group

India’s Growth Projected to Bounce Back to 7.2% in FY18

With the fading impact of note ban announced by the Modi government in November last year, Asia’s third biggest economy is expected to gain strength, maintaining its tag of the world's fastest growing economy.

International Monetary Fund (IMF), the international organization headquartered in Washington, has projected that the Indian economy will rebound to 7.2 per cent in this current fiscal year and rise to 7.7 per cent in the next, in 2018-2019.

The hurdles caused by demonetisation resulted into the lack of ready cash available with spenders. However, with the government’s remonetisation exercise, this problem is expected to gradually dissipate in 2017.

Other than remonetisation, a good monsoon season and developments in removal of supply-side problems will also help in balancing this disruption.

According to the report, improving productivity in the agriculture sector, which is the most labour-intensive sector and employs nearly half of Indian workers, remains a key challenge. Farmers require more flexibility in distributing and marketing their crops as this will help improve competitiveness, efficiency, and transparency, it added.

Further, a favourable monsoon could put an end to the almost continuous earnings downgrades that the domestic market has been witnessing in the past several quarters. According to the latest prediction of India Meteorological Department (IMD), the monsoon this year could be normal and bring 100 per cent rainfall instead of 96 per cent as predicted earlier.

Looking at the Asia as a whole, the IMF report estimates that the growth will accelerate to 5.5 per cent this year from 5.3 per cent in last fiscal. However, it warned that the near-term outlook for the region is clouded with significant uncertainty, adding that medium-term growth faced difficulties from a slowdown in productivity growth in both advanced economies and China.

Going forward, on the back of reforms initiatives being taken by the government, India’s growth rate will improve further. Stronger consumption and fiscal reforms are expected to improve business confidence and investment confidence in the country.

Latin Manharlal Group

Normal Rains Expected to Revive Indian Economy

India is likely to be lucky for second year in a row as the normal monsoon forecast of the India Meteorological Department brings the promise of a year of growth and good health for India’s economy and ecology.

In the first prediction for this monsoon season, the rainfall during June to September, is likely to be normal between 96-104 per cent of the 50-year average rainfall of 89 cms, the Indian Meteorological Department said.

If the forecast holds, it will revive rural demand, give a much-needed boost to the agricultural produce and help in taming inflation pressures. This could lead to the lowering of the food prices, strengthening of the agricultural incomes and eventually putting more purchasing power in the hands of the rural population. The forecast is also critical to the government’s hopes of achieving an expected growth rate of more than 7.5 per cent.

Two-thirds of India’s population depends on farm income and nearly 60 per cent of summer sown areas do not have assured irrigation facilities. Summer crops account for nearly half of India’s food output, including rice, lentils, sugar, spices, mangoes and oilseeds.

Moreover, IMD’s projection of 38 per cent rainfall, which is considered normal, would largely benefit water reservoirs, hydro-power projects and irrigation facilities for good harvesting. Industries such as FMCG, tractor and auto sector are also expectedto witness improved sales.

Further, IMD also flags the risk of El Nino in the latter part of the season. This does not necessarily mean a monsoon failure, as only a third of El Nino years are drought years.El Nino is a climatic phenomenon which is the warm phase of the cycle of warm and cold temperatures in the Pacific Ocean that also impacts the monsoon.

IMD, however, said weak El Nino and positive Indian Ocean Dipole (IOD) are presently combining to give a positive monsoon scenario for India in 2017.

Going forward, the growth in Asia’s third biggest economy would depend on the spread and the extent of the monsoon rains in the months ahead and impact of the Goods and Services Tax (GST) once it is rolled out.

Manufacturing Activity Recovers From Demonetisation Shock

India’s factory activity has fully recovered from the demonetisation setback with manufacturing sector expanding for the third straight month in March, taking activity back to the levels before demonetisation.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector rose to 52.5 in March from 50.7 in February, rising at the fastest pace in five months, with a reading above 50 signaling expansion.

The manufacturers attributed the latest rise in production to solid growth in domestic as well as export work orders. The new orders index rose to a 5-month high of 53.6 from 51.3 the previous month.

The manufacturing PMI had declined sharply following the government’s decision to withdraw notes of Rs 500 and Rs 1,000 on November 8. The move caused huge trouble to daily life and businesses in the largely cash-based economy. In December, manufacturing activity levels hit a low of 49.6, indicating a contraction in the manufacturing sector. However, as the cash crunch eased, the world's fastest growing major economy has largely recovered from Prime Minister Narendra Modi's shock decision.

The survey also showed encouraging signs on the inflation front, which has come squarely back on the central bank's radar in recent months. Input prices grew at a slower pace compared to February, and there was a corresponding slowdown in the pace of output price rises as well, which likely helped increase demand.

Indian inflation picked up pace in February to 3.65 per cent, after slowing in the previous month to 3.17 per cent, its lowest in at least five years, but it was still below the central bank’s 4 per cent target.

The Reserve Bank of India shifted its policy stance from accommodative to neutral and kept the policy repo rate unchanged at 6.25 per cent in its February meeting, opting to wait for more clarity on inflation trends and the impact of demonetization. The experts believe the central bank is unlikely to cut interest rates in its monetary policy review on April 06, 2017.

Going ahead, the survey projected a bullish outlook as business confidence among manufacturers improved in March, with almost one-fifth of the panelists expecting output levels at their units to be higher in 12 months’ time.

Latin Manharlal Group

UP Elections Victory Likely to put Govt’s Reforms Agenda Back on Track

With the election verdict in Uttar Pradesh giving Bharatiya Janata Party (BJP) a landslide majority in the state, the Indian economy is expected to touch newer heights. The stunning victory of BJP is likely to give an added impetus to government’s reform agenda, boost stock markets up, and hasten the implementation of big-ticket measures such as the goods and services tax (GST).
The election outcome, which comes in the backdrop of demonetisation, signals that people want the Centre to take bolder steps to stem black money, root out corruption and bring back illegal money from abroad. 

The BJP’s triumph in the state of Uttar Pradesh will give added power to Prime Minister Narendra Modi to aggressively push his economic agenda. This has also raised hope among investors that the BJP will embark on new reforms to boost growth in Asia’s third biggest economy, and tackle the corruption and red tape that has dented India’s potential. Investors are also eying pro-business reforms in Uttar Pradesh, such as digitising land records and making permit applications easier.

The Indian economy clocked a faster-than-expected growth of 7 per cent in fiscal third quarter, notwithstanding the demonetisation of high-value banknotes in November and the resultant impact on output as well as the consumption. The Global ratings agency Fitch expects Indian economy to grow by 7.1 per cent in the current fiscal before stepping up to 7.7 per cent in the next two financial years.

Going forward, the Narendra Modi led government is expected to remain focused on measures that will help to improve the ranking in terms of ease of doing business,significantly and persistently in the period ahead. Implementation of the GST from July will simplify indirect tax structure, reduce geographical fragmentation and widen the tax base, which will prove to be transformational for the Indian economy in the medium term.

With Narendra Modi now firmly entrenched in power until at least 2019, and perhaps further ahead, the focus will be on whether Modi can deliver on his promises of rapid development.

Latin Manharlal 

Indian Consumers most Confident Despite Demonetisation

Despite the effects of demonetisation, consumer confidence in India soared to the highest level in 10 years in the fourth quarter of 2016, indicating that Indians are most confident about their jobs prospects, personal finances and ability to spend.

According to a report by market research agency, Nielsen, the consumer confidence index score for India in the fourth quarter of the calendar year 2016 was 136, three places ahead of the rank it achieved in the third quarter of 2016.

The Nielsen consumer confidence index measures perceptions of local job prospects, personal finances and immediate spending intentions in 63 countries. Consumer confidence levels above and below a baseline of 100 indicate degrees of optimism and pessimism, respectively. 

The report suggests that demonetisation has not been able to dent the confidence of Indian consumers. The increase in consumer confidencecame at a time when the Government of India announced a ban on high-value notes, covered during the agency's survey period, stretching from October 31 to November 18, 2016. While the demonetisation move created short-term pains for consumers, the long-term outlook remains bullish.

Sentiment levels on local job prospects over the next 12 months have gone up by three percentage points to 84 per cent this quarter from 81 per cent in Q3, 2016. Over four in five online respondents (84 per cent) indicate increase in optimism on state of personal finance, same as the last quarter. In addition, 70 per cent urban Indians indicated that it's good time to buy things they want and need over the next 12 month for the quarter.

The surge in the consumer confidence is supported by the government’s vision to play the role of an enabler to ensure sustained growth. The government’s much campaigned ‘Make in India’ reform coupled with ‘start-up India’ campaigns are driving investments across sectors and propelling confidence in the business landscape.

Consumer confidence at global level moved modestly in 2016, rising three points between the first and fourth quarter to 101. The biggest increase was in the Philippines, where confidence rose 13 points from the first quarter to the fourth quarter. As per the report, the world's largest economy, United States came at the third position in the consumer confidence index, jumping 17 points as against the same quarter of 2015. 

Latin Manharlal Group

RBI Maintains Status Quo as Inflation Risks Rise

India's central bank has refrained from tinkering with the key lending rates, opting to wait for more clarity on the uncertain inflation landscape and on how a radical crackdown on black money is affecting economic growth.

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) kept its benchmark repo rate (the rate at which banks borrow short-term funds from the central bank) unchanged at 6.25 per cent, during its third bi-monthly monetary policy review -the sixth and the final one for the fiscal 2016-17.

The monetary policy announcement marked a key shift in the central banks’ stance. The MPC decided to change its position from accommodative to neutral in order to assess the transitory effects of demonetisation on inflation and output gap (the gap between actual economic growth and potential economic growth).

The change in stance essentially marks an end to a period in which the central bank slashed interest rates by a total of 175 bps from January 2015 to October 2016, starting with previous Governor RaghuramRajan and continuing under Urjit Patel.

The central bank also lowered its economic growth forecast for 2016-17 to 6.9 per cent from the 7.1 per cent it had forecast in its fifth bi-monthly policy in December. Before the demonetisation exercise, RBI was expecting the economy to grow at 7.6 per cent.

Retail inflation, the RBI’s benchmark gauge for prices, decelerated to a two-year low of 3.41 per cent in December, but RBI seems more focused on non-food, non-fuel inflation. With this move, the RBI hints that it will now keep its eyes on the inflation target of 4 per cent.

The monetary policy committee further highlighted concerns around the global policy environment, impact of rising global commodity prices and strengthening of the dollar among others.

At the same time, the central bank is expecting a recovery in economic growth in the coming financial year, albeit its gross value added projections show only a 50-basis point rise to 7.4 per cent in 2017-18.

Latin Manharlal Group

Union Budget to dictate trend in Equity Markets

As the Finance Minister Arun Jaitley prepares to present the Budget on February 01 post the big bang demonetisation move in November, Indian equity markets have picked up pace on the hopes of a positive budget.

The budget has traditionally been an important part of the financial year, with the government announcing exactly what it wants to do for the next year, and how it has performed last year. Any significant change in these announcements could induce a fear in the equity markets which may have a negative impact on traders and other market participants.

According to data compiled by ETMarkets.com, benchmark equity indices focused on large-cap, mid-cap or even small-cap stocks have always corrected up to 5 per cent every time the Budget countdown begins.

However, this time a ‘hope rally’ has already taken the Nifty index near the 8,500 level from the 7,900 level it quoted in December. The index is facing resistance near the 8,500 level and requires fresh triggers to rally higher. Meanwhile, the 30-share benchmark index has also performed well in January, partially owing to the expectations from the Budget and also due to the diminishing effects of demonetisation.

Though investors fear any populist measures as well as drastic changes in tax structures, an equity investor typically looks for tax sops in the Union Budget. Changes in personal income tax rates remain the most anticipated aspect in the Budget, followed by excise and service tax rates.

A nervous Dalal Street is pinning its hopes on the budget next week as an opportunity for the government to calm investors. According to the analysts, a small change in the long-term capital gains (LTCG) tax structure could drag the domestic equity market down by 5-10 per cent.

The general expectation is that the government will help the revival of the sectors that have succumbed to the demonetisation move. The Finance Minister is also expected to push policies that will help create jobs, affordable housing and infrastructure, besides taking care of the farmers and the agriculture sector. Additionally, there are expectations of a cut in tax rates for individuals and corporates alike. There are possibilities that the basic exemption limit for individuals will be pushed to Rs 5 lakh and the corporate tax rates will be brought down.

While most analyst remain optimistic on the road ahead for the equity markets from a long-term perspective, the markets are expected to be driven by more global events such as policy action by global central banks, policies adopted by the US under the new President and developments in the European Union (EU). Back home, outcome of the assembly elections is key for the overall market direction.

Latin Manharlal Group