Thursday, October 13th, 2016

How Brexit, US election will impact India’s growth story

R C Rajamani | October 13, 2016 9:48 am Print
The bad news is inflation worries remain – the main reason for RBI’s conservative monetary policy. The good news is that the apex bank still went in for a rate cut of 25 basis points at its meeting earlier this month
European Referendum, Brexit

Though one would like to share the optimism of global rating agency Standard & Poor that India can coast to 8 per cent growth if reforms are in place, the prospect is still dependent on other factors that are beyond the government’s control.

The two immediate factors yet to be assessed are the impact of Brexit and the US elections due next month. The bad news is inflation worries remain – the main reason for RBI’s conservative monetary policy. The good news is that the apex bank still went in for a rate cut of 25 basis points at its meeting earlier this month.

Even as the cheer over the cut was still being savoured, there came some depressing development. The country’s industrial output stayed subdued for the second consecutive month — decelerating by 0.7 per cent in August from a decline of 2.49 percent in July.

The fall was mainly on account of a 0.3 per cent drop in manufacturing output, which also has the maximum weight in the overall index.

Among the other two major sub-indices, electricity generation inched up by 0.1 percent while that for mining declined by 5.6 percent.

The data was no doubt a dampener with a huge drop in capital goods, implying thereby the investment cycle is stubbornly stuck in a cuticle. The situation indeed calls for some serious measures to boost consumption-driven demand which should encourage new investment.

The depressed private investment climate and global economic growth continue to stymie the manufacturing sector. The sluggish private investment demands sustained efforts to address the structural bottlenecks in the economy.
Meanwhile, terming GST as the most important structural reform till date by the Modi government, Standard & Poor has said the passage of the indirect tax law gives it the additional conviction of India clocking 8 percent growth in the next few years.

The rating agency had last month projected India to clock a “steroid-free” growth of 8 percent in coming years. “Inflation remains a risk, given the large weights on food, fuel, and other volatile items in the Reserve Bank of India’s target basket,” S&P had said.

The latest gross domestic production (GDP) figures showed that India’s growth slowed to 7.1 percent in the April-June quarter, from 7.9 percent in January-March.

Productivity growth has been bad in recent years. The Economist journal has pointed out that productivity growth in all of the G7 countries had fallen by 50% or more in the last decade, compared to the decade immediately prior.

In the US, for example, productivity growth averaged 2.5% per year from 1995-2005. Since 2005, it has averaged less than 1%. In Canada, Productivity growth averaged 1.5% between 1995-2005; since 2005 it has averaged 0.75%. In Germany, it has fallen to 0.75% from 1.7%, decade-over-decade; in France, to 0.6% from 1.8%, a drop of two-thirds.
The eventual impact of Brexit on India is yet to be assessed, though Government quickly allayed fears of any long-lasting adverse impact on India’s economy.

India has a huge corporate investment in the UK economy. Indian firms with manufacturing or other facilities in Britain will have to re-align their business plans. India has to rework its trade and investment strategy for the EU in the changed circumstances and position itself as the best partner to both UK and the rest of Europe, not at the cost of the other.

Currently, 16.6 per cent of India’s exports go to the Eurozone — of which 3.4 per cent go to the UK. India depends on the Eurozone for around 11 per cent of total imports, while the UK exports around 1.4 per cent of our requirements.
But the post-election scene in the United States presents a different kettle of fish. The bitter campaign speeches, especially by the Republican Donald Trump, have pointed to policies of protectionism and ever more stringent immigration rules and regulations. If these policies are implemented, it will augur ill for the economies of the rest of the world, including India.


The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Narada News or Narada Media Pvt. Ltd . The writers are solely responsible for any claims arising out of the contents of this article.

R C Rajamani
R C Rajamani
The writer is a veteran columnist. The author's views are personal and not of Narada News