View of the month - Of economic gaffes and political necessities : Edelweiss PDF link

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

The gloom is all-pervading with regards to India’s growth story. Persistently high inflation, widening CAD, elevated fiscal deficit, faltering economy with Q4FY12 growth slipping to 9-year low, dull equity markets and a swift fall in domestic currency – nothing seems to be going in favour of Indian macros. Never in its history of 20-odd years of reforms has the skepticism about India sunken so deep. While external factors such as elevated crude/commodity prices and lingering European debt crisis certainly have a role to play, our impression is that the government inaction is the root cause of economic troubles in India.

Against the backdrop of a gloom, it is easier to be skeptical. However, as Dr. Raghuram Rajan hypothesizes in his insightful article, “The public and its problems,” policymakers do tend to take tough actions once the political cost of inaction becomes greater than the political challenge associated with the potential solution. Put differently, once matters come to a head, policymakers are surer of their mandate to take hard decisions. We think that India is closer to that stage.

Cost of inaction is becoming clearer. The labour-intensive SME sector is under extreme stress and may start to downsize the labour force. Indeed, at sub-6% growth, Indian economy may find it difficult to generate gainful employment for all those who are entering the labour force each year (13mn new people join every year).  Further, the current ruling collation, UPA which has so far thrived on its ever-expanding social sector schemes will find it hard to generate financial resources for augmenting its existing schemes let alone adding new ones. These scenarios could be socially disruptive and politically very costly for UPA. As the realization deepens, the need to act will become more pressing

One must not forget that India’s long-term fundamentals are well in place, be it favourable demography, rising middle-class, private entrepreneurship and of course, democratic institutions, which may not be perfect but are not dysfunctional by any means.

In a nutshell, systemic pressure is building up in unison with the deepening gloom. Financial markets are losing faith and people at large are witnessing a scale back in their aspirations. In a democratic capitalist system, the force of such a pressure could be quite vigorous. Therefore government will have to act sooner than later especially when less than two years are left for 2014 general elections. Difficult decisions taken today can help turn around the economy and Congress could reap rich political dividends for the same in 2014.

View of the month - Of economic gaffes and political necessities

Regards,