Indian Economy's Strengths and Weaknesses-VRK100-01Sep2013

“Strength is weakness,” said George Orwell

The Strengths are:

1. The South-West Monsoon has been good this year providing boost to rural economy and may bring down pressure on food prices

2. Foreign exchange reserves at $278 billion are sufficient to cover about six months of imports

3. Steep fall in rupee may help India’s manufacturing sector with potential for higher exports provided Indian products are priced competitively abroad

4. Growing wealth effect: Spurred by rising gold and real estate prices, Indians’ wealth has gone substantially in the last decade, providing boost to domestic consumption though consumption growth rates may come down in future

5. Savings rate is high at around 30 per cent though it has come down in the last three to four years (of course, the high savings rate is mainly due to the fact that common people have no social security)

6. India’s population is very young providing good demographic benefits in the form of higher productivity and higher consumption of goods and services

7. Poverty has declined substantially of late though we are plagued with malnutrition, lack of potable water & sanitation, and illiteracy

8. The level of entrepreneurship has gone up substantially after liberalization

9. India has vast natural resources, such as iron ore, coal, water and arable land

10. India’s skills in export sectors – like, software services, engineering goods, gems & jewellery and garments – are well recognized across the world

11. If implemented properly, Goods and Services Tax (GST) will boost tax revenues

12. India has vast potential for tourism—be it medical, heritage or wildlife

The weaknesses are:

1. Loss of confidence in India’s ability to fix the economic problems and lack of strong political leadership

2. Falling Indian rupee is reflecting lack of economic reforms since 2004, though the Government lowered subsidies on petrol and diesel to some extent

3. Current account deficit has gone out of hand putting pressure on rupee

4. Fiscal deficit is getting out of control as the government is unable to control expenditure (huge subsidies on food, fuel and fertilisers) for about six years

5. Consumer Price Inflation remains very high at around 8 to 10 per cent for about five years, though wholesale price inflation is slightly on the mend

6. Large price rise in food articles is affecting the poor people very adversely

7. Retrospective tax amendments—for example, Vodafone tax dispute

8. Indian bureaucrats are partially responsible for delayed actions on the ground

9. Investors’ are concerned about controls on foreign capital outflows. In the last three months, foreign investors have taken out approximately $12 billion from Indian debt/equity markets, though many emerging markets have experienced flight of foreign capital.

10. India’s national income growth has slowed down due to high interest rates, decline in investment cycle, lack of economic reforms and weak global outlook

11. Indian corporates are burdened with high foreign as well as domestic debt

12. Manufacturing sector is down due to: mining bans, delays in environmental clearances, land acquisition problems, social unrest and others—the central government is unable to address these problems despite tall and hollow talks

13. There is massive skills deficit across industries

14. The central government is unable to push economic reforms as it is drowned in corruption scandals in the last three to four years. Unfortunately, corruption has permeated the entire social fabric.

15. The micro challenges for India are: poor healthcare, lack of quality and basic education, malnutrition, hunger, poverty and illiteracy

16. Hard infrastructure (roads, ports, power, broadband, etc) is very weak and energy security is poor. The present government has fully failed on this front.

17. Low productivity is impeding farm output and the government has done precious little except raising procurement prices for food grains

18. Focus of the Congress (I)-led UPA Government on vote-catching welfare schemes ignoring the ills of the economy completely

19. The Indian Parliament is interested only in uproars, walkouts, and logjams

To Sum Up:

India is facing challenges with high fiscal and current account deficits, lack of strong political leadership, falling rupee, high inflation, slowdown in portfolio inflows—which are overwhelming India’s strengths. Let us hope that good monsoon will bring cheer to rural economy and the political leadership will steer the economy on the right course with sound fiscal and monetary policies aimed at pushing India on the next wave of growth. May be, the 2014 elections will bring some clarity on this.

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Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial adviser before making any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

Connect with him on twitter @vrk100