RBI Cuts Interest Rates To Boost World’s Fastest Growing Economy


IndusView, Tuesday 2 June 2015 (London): The Reserve Bank of India (RBI) has today reduced its interest rates by 25 basis points to 7.25%, the third cut this year, taking advantage of subdued inflation to lend more support to India’s economy.

The Wholesale Price Index, India's most closely watched inflation gauge, has been in the negative zone since November 2014. In April last year, it was 5.55%. Deflationary pressure continued for the sixth month in a row with inflation dropping to a new low of (-) 2.65% in April, mainly on account of decline in prices of fuel and manufactured items even as food prices increased.  

“High inflation has been a constant roadblock for policymakers struggling to breathe life into Asia's third-largest economy and the RBI can’t be complacent about meeting its medium term inflation target,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Today’s decision is unlikely to be the last in the current situation but we are predicting only one more 25 basis point cut.”

The cut comes after the Indian economy registered 7.5% growth in the January to March quarter compared with a year earlier. That made India the world's fastest growing major economy, overtaking China's 7% growth in the same quarter.

Current account deficit (CAD) is estimated to be around 1.5% of the GDP in the current fiscal, helped by sharp fall in oil prices even as gold imports rose in the past few months, the Reserve Bank said today. Gold imports spiked in the month of March and remained elevated in April owing to regulatory relaxations and festival demand. In the first half of the 2014-2015 fiscal, CAD was at 1.9% of the GDP or $18 billion.

South Asia's economic outlook is largely favorable since most economies are expected to experience a strengthening of growth in 2015-2016 on the back of stronger domestic consumption and investment, and a pick-up in exports. According to the United Nations report, the region is projected to reach a GDP growth of 6.7% in 2015 and 6.9% in 2016, up from an estimated 6.3% in 2014.

While portfolio and direct foreign investment flows were buoyant during 2014-2015, with net foreign direct investment into India at $36.6 billion and net portfolio inflows at $41 billion, the year 2015-2016 has begun with net portfolio outflows in the wake of a reduction in global portfolio allocations to India.

“There is a need to further improve the business environment. Reforms in the last one year are welcome, but more needs to be done in order to build foreign investors confidence,” said Rangar. “Decline in foreign investments could put pressure on the country’s balance of payments and also impact the value of the rupee.”

Australia and New Zealand have recently joined Japan in order to persuade India to open its rapidly growing e-Commerce sector for foreign investments. These countries want to include the sector in the 16-nation regional trade pact that's being negotiated.

India does not allow Foreign Direct Investment (FDI) in the business-to-consumer (B2C) segment but 100% FDI is allowed in business-to-business (B2B) transactions, marking the difference in rules for retail and wholesale. It allows 49% FDI in multi-brand retail but with restrictions.

The government is under pressure to come out with a policy on the e-commerce sector in four months as brick-and-mortar retailers have filed a case in the Delhi High Court on the issue.

The pact includes 10 Asean countries and the six partners with which they have free trade agreements (FTAs), including Australia, China, India, Japan, Korea and New Zealand.


India's Economic Growth to surpass China's in 2015-16: UN Report


UNITED NATIONS: India's economic growth is projected to surpass that of China's, with the GDP expected to zoom by 7.7% in 2016, according to a UN report which said India will help accelerate economic growth in South Asia. 

The mid-year update of the UN World Economic Situation and Prospects ( WESP), released yesterday, said India's economy is projected to grow by 7.6% this year and 7.7% in 2016, overtaking China. 

China is projected to grow by 7% in 2015 and 6.8% next year. 

The report termed South Asia's economic outlook as "largely favourable" since most economies are expected to experience a strengthening of growth in 2015-2016 on the back of stronger domestic consumption and investment and a pick-up in exports. 

The region's GDP is projected to grow by 6.7% in 2015 and 6.9% in 2016, up from an estimated 6.3% in 2014; a significant revision of the previous forecast.

Average inflation in the region is also projected to fall to its lowest level in almost a decade, following the recent decline in oil and food prices. 

As a result, monetary policy has become more expansionary in several countries, notably in India and Pakistan, it said. 

However, despite the improved outlook, South Asia's economies face, to varying degrees, long-standing development challenges including energy shortages, infrastructure deficits and political and social unrest. 

The global economy will continue to grow at a modest pace. 


New India Budget Aims to Boost Growth


IndusView, Saturday 28 February 2015 (London): Asia’s third-largest economy unveiled its annual budget today saying it is aimed at a high-growth trajectory. The budget is focusing on improving infrastructure, cutting the fiscal deficit and boosting investment so that growth would accelerate to 8%-8.5% in India’s next financial year starting in April.

“The budget gives an opportunity to the increasingly young, middle-class and aspirational India to realize its full potential,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “The time was ripe for long-awaited reforms to kickstart the economy.”

Presenting the budget in parliament Mr. Jaitley said the country was growing at a strong rate, inflation was down and foreign exchange reserves were high. Falling global oil prices have given the government the room to spend on creating infrastructure without increasing inflation or messing with fiscal deficit targets.

He further announced a panoply of economic and tax reforms and promised $11.36 billions of dollars of investment towards infrastructure. Five ultra-mega power projects of 4,000 MW capacity each are planned. The government will introduce tax-free infrastructure bonds for road, rail and irrigation projects. The focus will be on additional road and ports projects.

To the delight of business, Mr. Jaitley said a nationwide general sales tax (GST) system – “a state-of-the-art indirect tax system” – would be put in place by April 1 next year, replacing a jumble of local fees and taxes that prevent India from being a single market for goods and services.

“This is not a ‘big-bang’ budget, but a good budget more focused on smaller issues, and ironing out a lot of irritants to investors in the process,” said Rangar. “Neither the financial markets, nor most analysts, detected the dramatic reforms that Mr. Modi’s supporters have been urging.”

Manmohan Singh, who served as India’s prime minister for 10 years under the Congress Party, faulted the budget as too cautious, arguing that the new government had missed a chance to cut spending or increase tax revenues.

Corporate taxes, meanwhile, will drop from 30% to 25%, which could increase Indian firms’ compliance.

This is a positive budget for the Private Equity (PE) industry as it addresses some of the key pain points of the industry. The removal of distinction between FPI and FDI is welcome as it is not really possible to differentiate between the two and has caused delayed response from investors. Foreign Investment is now allowed in alternative investment funds, which will stimulate the environment of foreign investment and private equity interest in India.

There are 200 plus active fund managers operate in India while 100 are domestic fund managers. The PE industry claims over 12% employment growth in PE/Venture Capital (VC) backed companies against 3% employment growth in non PE-backed companies.

Modi didn’t take further steps today to wind up fertilizer, cooking gas and liquid petroleum gas subsidies. Jaitley repeated pledges to provide homes, toilets and electricity for India’s 1.2 billion people by 2022, which would be the 75th anniversary of the country’s founding.

India’s economy is projected to expand as much as 8.5% in the next fiscal year, according to the latest Finance Ministry estimates, the fastest pace among the world’s biggest emerging markets. The ministry cautioned, however, that the forecast is based on a revised method for calculating gross domestic product and India’s economy is still recovering.