What is required next to kick off the growth cycle in the economy?

By Ranjan Chakravarty

The last quarter of this eventful calendar year is upon us. We strongly feel this is an appropriate time to take stock and make assessments, as significant time remains in this calendar for anticipation and action, while there is also the benefit of immediate hindsight.

From a broader perspective, three themes have played out this year. First is the uncertainty on the agriculture front. A delayed start to the monsoons caused a spike in prices at the start of the second quarter, which stabilised once the rains started. By September, we were seeing the impact of this excess, with agricultural stocks, storage and transportation being adversely affected by excessive rains, leading to a renewed spike of prices.


That should abate this quarter, and we expect the impact on agricultural prices to be relatively benign for the remainder of the year.

The second is uncertainty in oil and energy prices. We clearly saw the impact of one disruptive event this year -- that of the Houthi attack on Saudi Aramco’s facility that caused prices to appreciate dramatically. This caused the rupee to nearly breach the upper limit of its expected trading range for a day. However, we again saw the uncertainty wane as volatility in both oil price and rupee subsided relatively quickly. It looked like they would stay stable for the rest of the year.

The third is uncertainty in interest rates. On this front, we began the year with great uncertainty. However, both the US Fed and RBI have allayed this substantially over the year. As it stands, there is no ambiguity on the interest rate front, and we can reasonably expect RBI to clearly deliver a rate cut of at least 35 basis points in its next policy announcement.

As we see it, this is a turning point. As uncertainty drops dramatically, a tax cutting policy paradigm has gained momentum. We have seen what the first round of tax cuts has delivered. The equity market’s one-day boom was unprecedented in its endorsement. With the next round of tax cuts on the horizon, and uncertainty abating in all asset classes, all that is required is a bump-up in consumption to gear up the consumption-investment-led growth cycle to take it to the next level. Real investment will be driven by the impending credit offtake, which is likely to grow almost immediately with the cleansing of the banking sector and measures for easing industrial investment that will be actualised shortly.

With consumption driven by tax cuts and a consequent increase in effective disposable income, coupled with tight fiscal discipline, all macroeconomic parameters remain sound. Growth is on the cards. We see it coming very soon, and sustainably so.

(Ranjan Chakravarty of Product Strategist at Metropolitan Stock Exchange. Views are his own)