India’s ‘Goldilocks’ moment and your money

Over the past few weeks, analysts have pointed out that India’s economy could be passing through it.
Economy
Image used for representational purpose.(Express Illustration)

A steady economic growth, accompanied by low inflation and a market-friendly monetary policy, creates a ‘goldilocks’ moment for an economy. The term ‘Goldilocks’ is inspired by the fairy tale ‘Goldilocks and the Three Bears. Stock market investors love such a phase. Those who have invested regularly over the years know of the sense of comfort such a phase creates.

Over the past few weeks, analysts have pointed out that India’s economy could be passing through it. That is a very conducive environment for businesses to expand, create demand and sell more goods and services. Between 2004 and 2008, when India’s economy expanded rapidly and the inflation rate stayed low, the stock market boomed. Many analysts are hinting that the next five years are likely to see a repeat of that period.

The economy

Major global institutions like the IMF, the World Bank, the Reserve Bank of India, and several experts predict a steady economic growth of 6% to 7% for India’s economy. Some predict a faster pick-up in growth than the average. A predictable rate of growth allows businesses to plan for the future. They allocate more money towards business expansion and create jobs. Since the COVID-19 pandemic, the Indian government has allocated more money towards capital expenditure and fulfilled that responsibility. However, many pundits believe that businesses would start investing once again.

Along with government spending on infrastructure, if businesses invest in it, it would further push economic activity by creating new jobs and boosting consumption. If private investments pick up, the government could increase subsidies and put more cash in the hands of the people. That would enhance the demand for goods and services. During the 2004-2008 phase, the government used the Mahatma Gandhi National Rural Employment Guarantee Act or MNREGA. Many analysts believe that the government’s finances are vital and should prompt actions to boost consumption. Rural household spending shrunk after the COVID-19 pandemic and has yet to reach the pre-pandemic levels. However, the latest quarterly business results indicate a pick-up in rural consumption.

Low inflation, monetary policy

That is perhaps the most considerable and most significant influence on your money. The re-election of the National Democratic Alliance led by Prime Minister Narendra Modi would mean a policy continuity. The same ministers handle critical portfolios in the third term. The Union Budget for 2024-25 will likely be presented in July 2024. According to Morgan Stanley, a global bank, the government will likely focus on macro-stability.

After crucial interest rates were left unchanged, the Reserve Bank of India’s monetary policy committee comments indicated that the RBI will continue to focus on interest rate hawkishness. That is despite two committee members recommending a cut in borrowing rates to stimulate economic growth.

However, RBI continues to flag risks related to food inflation but continues to support growth. It returned over Rs 2,00,000 crore as a dividend that the government did not anticipate in the interim budget presented in February 2024. The money would support any government spending that could stimulate growth without putting any pressure on borrowing rates.

A Morgan Stanley analysis shows that the government’s management of the fiscal policy and the RBI’s focus on price stability has made inflation volatility the lowest level in history. The other exciting pointer highlighted by the bank shows that the intensity of India’s oil imports as a percentage of GDP is down to 4% from 8% of GDP earlier.

The relatively lower intensity is due to a higher use of electricity. The introduction of GST and electronic tolling on highways has reduced waiting time for trucks, faster highways, better cars, and alternative fuel. The decline in the intensity of oil imports has helped corporate profits and narrowed the current account deficit, supporting the Indian Rupee. That would ensure that inflation due to higher imports than before would remain in check.

A stable macroeconomic environment, low inflation, and better economic and earnings growth prospects mean that stock markets will continue to hold their current levels and rally with increased profits.

Rajas Kelkar

(The author is editor-in-chief at www.moneyminute.in)

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