A Make or Break year?

Stock market movements are always driven by future expectations, and right now those are optimistic. The Sensex gained over 35 per cent since January 2014 and zoomed to new highs. Sentiment is good. Most players think growth will rebound in 2015.

Are those expectations entirely justified? Tough question. “Achhe din” was a winning election slogan. But over seven months after the new government was sworn in, the data shows the good times are still distant.

India has a massive economy and a turnaround was never going to be as easy as coining catchy slogans. Conditions have certainly improved: inflation is down, but it’s been a slow, gradual recovery. GDP growth in 2014-15 may be around 5.5 per cent, an improvement over 4.7 per cent in 2013-14. Growth may accelerate to 6 per cent in 2015-16.

The government must tackle huge problems, challenges and expectations. A million people enter the workforce every month. To generate enough new jobs, reforms are vital.

If 12 million-odd new workers can be absorbed into the workforce every year, the so-called demographic dividend will translate into sustainable long-term GDP growth.

Otherwise, “achhe din” goes out of the window, and we will see millions of discontented young citizens wandering the streets.

We need reforms on multiple fronts: In labour laws, to induce entrepreneurs to start labour-intensive businesses without fear of being bogged down by unionised unrest.

In tax laws, to bring about uniformity in goods and service taxes. In land acquisition laws, so infrastructure projects don’t get bogged down, either by difficulties in acquiring land, or by post-acquisition unrest due to anger over acquisition methods.

In the education system, to give young people the skills they need. Also, India will need huge dollops of cash to come from abroad.

All these are politically sensitive areas and major lobbies are opposing changes. The Centre must first be brave enough to draft effective laws, and then “market” these in the Rajya Sabha (still not BJP-controlled).

Third, since labour, GST, land acquisition and education are all areas where the states have a major say, they have to be brought on board so that local laws/rules are reframed.

The Budget will be extremely important in this context, as it will send a clear signal about the government’s intentions. All the more so as the Planning Commission is also being superseded.

Externally, India got a windfall in lower crude and gas prices. This helps balance the trade account since 80 per cent of India’s crude and one-third of gas is imported.

Low crude prices also mean lower inflation and smaller subsidies. If crude remains cheap, that’s great for India.

But there is a possible downside. Crude prices are low as the world economy is in poor shape and energy demand is low. The EU is on the edge of recession.

Japan is in recession, China’s growth is slowing. Only the United States expects strong growth through 2015.  Such global weakness could mean slowdowns in Indian exports and slowdowns in foreign investments into India (FDI and FII).

Merchandise trade (imports/exports) contributes over 42 per cent of India’s GDP and this may be affected. Tourism and other service sector industries may also be hit by slower global growth.

However, there is also plenty to say on the positive side of the ledger. As inflation falls, interest rates will also inevitably dip.

Lower interest rates will not only mean higher profits for rate-sensitive companies; it could mean a revival of consumption demand. People are more likely to buy cars, houses and washing machines if EMIs are affordable.

Ultimately, how much reform does the Modi government dare contemplate? Politics is the art of the possible and it is unlikely the BJP will push reforms beyond whatever it thinks it can get away with.

As of now, the stock markets are up because people expect substantive change. Next year will be make or break for those expectations.

Devangshu Datta is a commentator on the Indian economy