Indian Economy- Headwinds Remain

Indian Economy- Headwinds Remain

The tapering of the Quantitative Easing (QE) will have impact but it will be minimal. There will be some flight of the capital back to the US but that will not have a major impact. Some of the macro-economic tailwinds like higher reserves, lower current account deficit, easing inflation and fiscal consolidation will help India tide over the situation.

Another good news is that the much speculated rate hike did not come from the Fed in the US and that will help the Indian stock markets retain the status quo, which at this point is high growth.

The other developed economies such as Japan and European Union are expected to have an expansionary monetary policy to provide impetus to the growth in their economies.

The indicators from the rating agencies also show that there could be sovereign rating upgrade for India. 

However, there are still lot of aspects that need to change in India for a new growth cycle to set in.

The US economy on its part grew by more than 3% in the last quarter, the choices available for the investors have grown.The choice to the investors will be about high-growth or stable growth. 

This brings us to the topic of certain headwinds that remain. India has been dilly dallying with the black money issue. It is yet to sign the Foreign Account Tax Compliance Act (FATCA) treaty with US. Failure to do so will start hurting the economy beginning next year.

There are two implications if FATCA treaty is not signed. 1) if India doesn't sign the Fatca, no US company will find it attractive to invest in India due to withholding tax of 30%, 2) Similarly, Indian companies could also face difficulties in raising external commercial borrowings or see their costs go up as payouts to non-compliant jurisdictions would mean an additional withholding tax outgo of 30% not just in the US but also in other countries, including OECD nations that have endorsed FATCA.

The policy paralysis that seemed to had gripped the UPA government so thoroughly seems to be raising its tentacles especially on the issue of black money.

The Indian government needs to realize that it is the black money that funds terrorism and other nefarious activities. This brings us to the other headwind regarding law and order situation. With many terrorist groups openly targeting India and Indian state governments caught napping many a times, this could become a serious headwind against India’s growth.

References:

http://economictimes.indiatimes.com/articleshow/44988833.cms?curpg=2&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst