The Baseline    
07 Dec 2017
RBI says the economy is beginning to recover. Are there green shoots?

The RBI's Monetary Policy Committee, noted in its meeting yesterday of a potential upswing in inflation, enough that the Bank decided to keep its interest rates unchanged. But it also noted that the economy may have already bottomed out, with increasing GDP growth seen, and industry growth recovering. 

A continuing concern for investors is rising fuel prices, with OPEC and allies including Russia holding on to production cuts to keep prices hovering around $60 a barrel. There are other constraints worrying analysts about oil prices moving upward, including the recent unpredictability in Saudi Arabia politics, where tensions have risen with Qatar and Yemen, as well as Venezuela, another key oil producer, at the brink of chaos. Rising oil prices are one of the major factors driving RBI's concerns on inflation. 

There are some upsides for India domestically however, thanks to recent regulatory policies. The Bankruptcy Code and new, stiffer regulations against loan defaulters and action on NPAs is likely to help the bank sector into better health in the coming months. NPA resolution will be critical to helping credit recovery and healthier loan growth. Insurance and mutual funds are already seeing growth as Indians look for better returns on their investments.  

Real estate is beginning to recover after the introduction of RERA. Better protections for customers, as well as greater accountability for real estate developers signals more transparency in this sector. 

In infrastructure, a push from the Centre is driving a potential recovery. One is in irrigation, where projects totalling approximately Rs. 80,000 crore have started, according to Minister Nitin Gadkari. In aviation, 18-19 new airports  are being implemented in tier II and tier III cities, giving a boost to companies such as Indigo and SpiceJet. Morgan Stanley recently reiterated optimism in India's aviation sector growth. 

Progess in agriculture however, is concerning. While FM Jaitley has made ambitious statements about doubling farmer income by 2022, the facts on the ground are disappointing. Agriculture is definitely down, despite a ‘normal’ monsoon year — GVA growth in the sector has slowed to 1.7%, from 2.3% in the first quarter. Growth was 4.1% in the same period last year. Foodgrain output in the kharif season contracted by 2.8%, compared with a 10.7% expansion in the same period last year. This is set to hit rural demand and farm income. 

Overall, there are green shoots. But the government's ability to address the bottlenecks in consumer incomes and demand, due to slow agri growth and rising inflation, will make the difference between an average recovery and a significant, extensive one. 

Samuel Zeller

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