BNP Paribas: Indische Regierung auf einem guten Weg

Taking stock: the reforms so far

One of the reform measures worth mentioning is inflationcontrol. This is being achieved by reducing support price hikesto the bare minimum and focusing on fiscal consolidation. Taxreforms are being introduced with a push to implement theGoods & Services Tax by the fiscal year to March 2017 (FY17).Other measures include direct benefit transfer to reduce benefitlosses and thus curb the overall subsidy bill. ‘Jan Dhan Yojana’aims to give every household a bank account as a first steptowards financial inclusion besides helping with direct benefittransfers. ‘Swach Bharat Abhiyan’ is an effort to clean up Indiawith a view to improving health, hygiene and productivity.‘Make in India’ is a thrust to enliven and move manufacturingto India to create jobs, raise exports, reduce imports and buildskills. ‘Digital India’ is an aggressive effort to wire up Indiathrough broadband access across rural areas.

Further measures include ‘Skill India’, smart cities, housing forall by 2022, greater ease of doing business, more transparencyin the allocation of natural resources and banking reforms.

Laying the ground for a sustainably higher growth rate

These initiatives not only envisage government spending, butalso are participative and inclusive and should entail investmentby banks and the private sector along with the government.We believe the various measures when implemented over thenext few years should provide significant gains in terms ofhigher, more balanced and more sustainable economic growth.However, some of the measures will be time-consuming andbenefits should become visible only gradually. The challengesfaced by the government are: the ability to pass some billsin the upper house of the parliament where it does not havea clear majority, the risks related to timely execution of theinitiatives and global market conditions.

Inflation targeting

Recently, the RBI, India’s central bank, and the governmentfinalised the monetary policy framework introducing inflationtargeting to end a long history of volatile price rises. The CPIinflation target was set at 4% plus or minus 2% for FY2017 andbeyond after aiming to bring inflation to below 6% by January2016.
Inflation targeting, more commonly seen in developedeconomies, should result in a stable inflation rate whileoptimising the trajectory of long-term GDP growth. Withinflation decelerating in the last few quarters, the timeappears to be right for a country to start pursuing inflationtargeting. For this to be successful, a coordinated effort bythe government and RBI is required: the RBI has to deliver onits broad and comfortable target of 4% (+/-2%) and operateconsistently and transparently in terms of communication withthe market about its approach, while the central governmentshould deliver on fiscal consolidation.

India looking well prepared for a Fed rate hike

India is on a much better standing now compared to mid-2013 when market talk of the US Federal Reserve taperingits quantitative easing programme caused a sharp marketcorrection. Many emerging market currencies plunged versusthe US dollar, but since the rout, the Indian rupee has beenone of the most stable currencies thanks to RBI measures toshore up the country’s foreign exchange reserves, curb goldimports and holding on to higher interest rates despite fallinginflation.
Softer commodity prices, especially oil, have helped to lowerthe budget and trade deficits. All this has resulted in near alltimehigh forex reserves and a fall in current account deficitto manageable levels of less than 2% of GDP.

On the path to recovery

While fiscal deficit is contracting more slowly as thegovernment focuses on reviving growth, it is at a manageablelevel, in our view. The economy is on the path of recoverywhich should boost corporate earnings growth. Lastly, thenew government’s credibility has played a major role inkeeping investor sentiment positive and supporting the equitymarket and will likely continue to do so as the governmentmore than ever remains committed to reforms.

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