FY15 one of sentiments; FY16 a year of action

The year 2014 has had its share of good news in terms of a stable government with majority seats and expectations that the new budget of fiscal 2016, to be presented in February, will be growth-focused.

The not-so good news is that policies are yet to be framed in key economic-growth related areas even though the Bharatiya Janata Party's absolute majority in the government has renewed hopes of growth that has been languishing sub 5% levels in the last two fiscal years.

As for the progress so far, the current fiscal 2015 is expected to end with a modest 5.5% growth, say economists and bankers.

"The cyclical uptrend in the economy with FY15 growth expectations despite hardly any agriculture growth has been commendable and one can expect a 6-6.5% in FY16 said UR Bhat, managing director at Dalton Capital Advisors (India) Ltd.

Since the formation of the new government in May 16, 2014 most business houses have been bullish on a sustainable turnaround, but then policies on labour, land reforms, energy needs to be in place for a takeoff.

"The road ahead is promising but time consuming," said Sunil Kanoria, vice chairman at Srei Infrastructure. "We have the coal allocation process to be in place by March, the telecom spectrum auction before the fiscal year ends and an exit policy for infrastructure, road in particular, where there are entrepreneurs wanting to exit but cannot due to a lack of policy," he said.

Kanoria feels the impact of the economy growth, once the policies are in place, will be felt in the later part of fiscal 2016-17, though the coming fiscal year will see some marginal improvement.

"Sentiments have turned positive with some pockets like roads, auto sectors beginning to show growth," said Shubhada Rao, president and chief economist at YES Bank.

On the macroeconomic side, challenges in the fiscal deficit remains a concern because tax collections have fallen below expectations, largely due to dismal pick-up in the job-creating manufacturing sector. Interest rates remain stubbornly high with the Reserve Bank of India maintaining its hawkish stand at 8%, fearing a weaker rupee and the likelihood of rate hikes in US.

There has been no demand for bank credit where the latest RBI data registered a year-on-year growth at its decade low of 10.93%. This substantiates what most economists opine, that the weak credit demand has been largely on account of negligible capacity additions in the manufacturing sector.

The government borrowings topped 90% of the budgeted target as of October end and this has led to some stress on the government's commitment of maintaining fiscal deficit at 4.1% of the GDP. But then the government is expected to raise Rs 43,425 crore, though there are reservations on the target by many experts, through stake sale of its companies.

The slide in global crude oil prices has come as a blessing in disguise for the government. From a high of $115.71 on June 19, Brent crude has slipped to below $60 recently and currently hovers in the $60-62 band. Still it's a comfortable case for India that is so heavily dependent on oil imports and hence a bulging current account deficit (CAD). The slide has helped the Modi government to contain oil and fertiliser subsidy besides helping it totally deregulate diesel prices. CAD for the third quarter ending September was up $10.08 billion from the previous quarter's $7.86 billion largely on account of surging gold imports, which economists say can be easily controlled by the government.

"The greatest relief (on fiscal deficit) comes in oil subsidy with the falling crude prices," said Rao. "About Rs 60,000-Rs 70,000 crore can be saved on subsidies. Eventually, the government will need to compress capital expenditure," she said on the government's challenging target of 4.1% for fiscal deficit.

Way back in October when the government borrowings touched 90%, brokerages had said this was likely to force finance minister Arun Jaitley to announce a series of spending cuts.

Inflation too has come down to sustainable levels from April 2014 high of 8.59% to 4.38% as of November.

"Over the past year the macroeconomic landscape has changed considerably for the Indian economy. The pick up in growth seems to be taking place at a time when inflation is on the downtrend while business optimism seems to be on the rise," said Anis Chakravarty, senior director at Deloitte.

Though India has benefited from the global slump in commodities and domestic inflation being well within the RBI's 6% target for January 2016, fresh investments into the country are not expected any sooner as worldwide, barring the US, economies are on a downtrend.

Given the backdrop, all eyes are now set on the government's budget announcement in February for the coming fiscal.