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5 economic data points explained
The market has been volatile for the past many weeks. A key reason has been the negative global investor sentiment. However, part of it is also because of the slower-than-expected pick up in the Indian economy.
This is why it is important for investors to understand how the economy works. That said, reading the signals can be quite confusing. Here are five economic data points explained:
Economic growth
There are mixed reports on the possible economic growth in the current fiscal year ending March 2016 and the next fiscal year. The government lowered its forecast to 7-7.5% for the current year. It expected the economy to grow 8.1-8.5% earlier. The good news is that India would still be growing at the fastest pace compared to other large economies in the world. This trend is expected to continue in the next fiscal year too. While the world is expected to grow at a slower pace of 2.9% than expected, India could grow 8.1% in FY17, according to a report by CRISIL, a credit rating agency. The International Monetary Fund (IMF), however, expects a lower growth rate of 7.5%.
Bottomline: Growth is expected to rise in the coming fiscal year. That said, the world economic growth is still likely to be under pressure.
Safety Net for LenderEl Nino & Monsoon woes
This growth, however, depends on one key factor – the monsoon. India faced a drought for the past three years. This dampened growth in agriculture and food output, eventually affecting the rural areas. This led to a continue pressure on consumer demand – it’s but natural to curtail spending when money is limited. The poor monsoon in 2015 was linked to an El Nino effect. This is unlikely to happen in 2016.
Bottomline: Monsoon is the crucial factor in 2016. A poor monsoon could affect agriculture and overall growth. “This will increase stress among farmers, dent rural demand and pull down even non-agriculture GDP. We estimate that growth will then drop to 7.4% in fiscal 2017,” the CRISIL report said.
Export growth & China
Another key reason behind the bearish sentiment in the stock market is the slowdown in the Chinese economy. The country is undergoing many structural changes in the economy like liberalization of markets, consumption-based growth, etc. This has caused the decline in economic growth. This slowdown has hit Indian exports in two ways – lower Chinese imports from India and slower growth in other economies. Exports fell 14.7% in December 2015 from the previous year. This risk could continue in 2016 as well.
Bottomline: India is exposed to external shocks, mainly because of its trade links to economies witnessing slowdowns. “These externalities in India can attenuate if vulnerability of the Chinese economy worsens,” according to the CRISIL report.
Current Account Deficit
The rupee depreciated to record levels in January this year. However, this is mainly because of the outflow of funds by foreign investors – another side-effect of the Chinese slowdown. “We expect the rupee to settle close to 65 per $ by March 31, 2017, appreciating from 66 per $ by March 31, 2016,” CRISIL said. This is because India has managed to control its Current Account Deficit – the amount India owes to the world in foreign currency – thanks to the low oil prices in international markets.
Bottomline: The rupee is likely to appreciate again moderately in the year ahead. This, however, depends on faster growth and lower current account deficit.
Fiscal Deficit
The Indian government has repeatedly spent more than it earns. This had led to a high Fiscal Deficit, which the current government is now trying to control. It expected to reduce Fiscal Deficit to 3.9% of the GDP by March 2016. However, with the GDP not growing as much as expected and low tax revenues, it is quite likely that the government may miss the target.
Bottomline: CRISIL expects a Fiscal Deficit of 4.1% unless the government manages to earn additional revenue or cut expenditure by Rs 164.6 billion.
72%
Every year, the government plans to spend a certain amount of money in productive ways. This is called Capital Expenditure. Between April and November 2015, the government spent 72% of its total Budgeted amount for such productive use. This is much higher than the 51% expenditure in the previous year. Such efforts are essential to buoy the economy.
