Oil prices touched $86 per barrel.
IL&FS crisis played out,leading to markets slowdown.
Four fed rate hikes occured.
Rupee depreciated to an all-time low.
Trade war between two superpowers played out.
Yes, India witnessed all of this in a single year. Yet, it is the fastest growing economy in the world today. But wait, has India reached its limit?
No, not by any means. India still has huge firepower left and clocks incredible growth in the coming years. India is expected to grow at 6.7% (Gross Domestic Product) in Fiscal 2019 (FY 2018-19) as estimated by CSO (Central Statistical Organization).
This is by far more than what the global GDP will grow at, which is estimated to be around 3.9 percent for fiscal 2019.
CRISIL expects India’s growth to be 7.3 percent in Fiscal 2020. But there are various ifs and buts. Meaning, various situations have to pan out accordingly in order to post this growth.
Therefore, let us discuss the major hurdles in India’s growth story and what are the reasons that may seem to be in its favour in the near future.
The Year Gone By
Last year was a tumultuous year for our country which witnessed various global and domestic scenarios playing out. It could be said that last year was a year of recovery from demonetization and the disruption caused due to GST (Goods and Service Tax).
The economy today has been dependent on the public investment. However, private consumption has not shown enough growth.
1.Consumer Price Inflation
Given the continuous and sharp decline in food and fall in oil prices in the latter half of the year, CPI inflation for FY 19 is expected to be 3.7 percent.
This would be the second consecutive year of 4 percent growth. This will eventually be good for the economy as the Central Bank can change its stance to neutral from calibrated tightening (might also cut the repo rate by at least 25 basis points from the 6.50 percent currently) in the upcoming meeting.
This will give the much-needed relief to companies which have been reeling post the NBFC crisis.
The oil prices moved from $52 per barrel to as high as $86 per barrel and then fell to roughly $55 a barrel in the later half. As India imports 80 percent of its oil requirements, a sharp decline in oil prices helped our scenario.
(As a statistic, with every $10 increase in price of oil, there is 10 basis points added to the inflation).
Therefore, the rally in oil prices had spiked the inflation which eventually was subdued in the latter half.
3.Fed Rates Hike Rupee Depreciation
We might have heard the common saying “India has twin problems”.
The first, increase in prices of oil and second is that of rupee depreciation.
The fed rate hikes that occurred throughout the year led to the bond market sell-off in the emerging markets. This led to sharp weakening in currencies for countries like India who run a current account deficit (CAD).
The IL&FS saga that played at the end of the second quarter has taken the NBFCs like a storm and the investor sentiments too took a hit.
Subsequent measures were taken up by the government to provide some relief to the sector. Given the change in inflation trajectory, there might be rate cuts in the near future, which will induce some amount of growth in this space as the cost of deposits fall.
The Road Ahead
Now that we have discussed the year gone by, let us see how the parameters shape out in the upcoming fiscal.
These domestic and global parameters as shown in the table below will shape India’s growth trajectory in the coming years.
|Monetary policies in advanced economies especially USA||Monsoon Performance|
|Trade wars between nations (USA vs. China)||Election Outcome|
|How Brexit pans out?||Resolution of NPAs and recapitalization|
|Oil Prices||Monetary policy easing|
|Situation and progress on reforms and|
|Domestic liquidity situation (especially need to watch out for the NBFC space)|
In the growth outlook for fiscal 2020 (estimated to be 7.3 percent), CRISIL has based the following three assumptions:
- Normal rains;
- Oil prices to remain lower than 2018;
- A stable political outcome
With the government mostly following the fiscal consolidation path and the pick-up growth mostly coming from the private consumption, which has performed badly last year.
From the three assumptions stated above, the second seems probable but the first and third might be considered as a grey area.
The recently concluded elections in four states, was considered to be a litmus test for general elections 2019. Therefore, if the general elections yield a fractured mandate, it will widely impact the investor sentiments. This might derail the growth prospects in the near future.
However, given the weak global GDP scenario (likely to be 3.7 percent as projected by IMF), there will be less demand for oil and hence the commodity is expected to be in the range of $60 – $65 per barrel. This provides relief to India’s CAD.
Also, coming to the monsoons, if there are normal monsoons next year as well then it will be fourth consecutive year of normal monsoons.
Note: The National Oceanic Atmospheric Administration of United States is forecasting an El Nino event in 2019.
India had faced two El Nino events, one in 2014 and the other one in 2015. El Nino is an event which occurs every three to five years and weakens the Asian monsoon, often causing drought in Central India and heavy rains or even floods in north-east.
During these periods i.e 2014 and 2015, the agricultural GDP growth had dropped to nearly zero. This might further inflict the pain in already reeling from the economy.
The government, therefore, should think of some relief plan such as MSP in the coming years as well).
However, the growth of India is not just dependent on these events. There will also be benefits that will shape up in the coming years.
The best example can be GST. Though the tax collections have not been as per the expectations of the government, most of the loopholes in the tax structure have been fixed.
Note: IMF had predicted that GST would add around 1.5 – 2 percent to the GDP of the country in two to three years, post implementation.
The upcoming year might also see growth from tax collections which may induce the government for further spending in key areas)
Slowing global demand and trade war will hurt India’s export in 2019. This also happened in 2018 after USA levied tariffs on steel and aluminum, which further weakened net exports.
Though there are few headwinds to India’s growth but there are various boxes which are ticked to see India growing at around the region of 7.3 – 7.5% in fiscal 2019.
We just need to hope that the country doesn’t see any more surprises after the many challenges it faced in 2018.
|Organization Name||Growth Outlook (FY 2019-20)|
|International Monetary Fund||7.4%|
|Asian Development Bank||7.6%|
Disclaimer: The views expressed in this post are that of the author and not those of Groww