Election season is upon us and the economy is bearing the brunt of it.
With various political parties fighting it out in the polling station, India is at an uncertain period in terms of economic growth.
Why this uncertainty? Well, the reason is simple.
To put it in layman’s terms, businesses depend on the government to create favorable economic conditions in order for them to grow.
This is a constant process of communication and negotiation and a change in government represents uncertainty in the economy, precisely because of a possible breakdown in communication.
New governments, especially in India, bring with them new economic policies and possibly officials who have a different view of how the economy should run.
A change in government means that businessmen have to re-negotiate a lot of things with the new government, something that could drive a spanner in the wheels of their plans.
In 2014, the Narendra Modi government galloped to victory in the elections, with the Prime Minister promising that India would create millions of jobs for its young population, with particular emphasis on the manufacturing sector. The years after have seen mixed results, although there has been steady foreign direct investment.
Till the dust settles on the elections, this will be unclear, as indicated by Dun and Bradstreet’s (D&B) latest Economy Forecast.
According to the report, subdued consumption demand and election related uncertainty is expected to weigh on India’s industrial production. D&B expects Index of Industrial Production (IIP) to be moderated by 1.0-1.5 percent, during the election season of 2019.
“There are concerns that the dip in the growth momentum in Q3 FY19 is likely to continue, given the headwinds in the global economy and the various domestic issues,” said Arun Singh, Lead Economist Dun & Bradstreet India.
The Index of Industrial production is an index for India which details out the growth of various sectors in an economy such as mineral mining, electricity and manufacturing i.e the core sector.
Published by the Central Statistical Organisation (CSO), every six weeks or so, the IIP is an abstract number that indicates status of production in the industrial sector, with maximum weightage given to the eight core sectors, which are:
The manufacturing sector is the worst hit by election-related uncertainty.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) declined from 52.6 in March to 51.8 in April, reflecting weakest improvement in business conditions since August 2018.
In layman’s terms, a score above 50 means expansion, while a score below that denotes contraction.
FDI declined in the previous year. Let’s have a look at the table below.
Change in FDI Inflows during April-December 2018
In fact, the decline in investment was underway well before the elections were on the horizon.
In the nine months leading up to December 2018, Foreign Direct Investment in the Indian economy (the third largest in Asia) fell seven percent, indicating falling investments before the upcoming elections season.
FDI inflows into India during the period was $33.5 billion, lower than the $35.9 billion in the year-ago period, and the manufacturing sector took the biggest hit of the lot.
India’s economic slowdown comes at a crucial time for the economy, in terms of trade.
In fact, India’s condition is in stark contrast to its South Asian neighbors. As the US President Donald Trump threatens to increase tariff on $200-billion worth of Chinese goods and targets hundreds of billions more soon, trade talks between the US and China have hit a large roadblock.
Vietnam, Thailand, Philippines and Malaysia are seen poised to benefit from the trade tensions.
They are, in fact, using this period to combat Indian hegemony in the market by inviting investments.
Another area where we can see the effects of election, is in inflation rates.
Input cost inflation eased to a 43-month low while the rate of charge inflation was marginal and below its long-run average. A lower rate of inflations sounds like a good thing, right?
Not exactly. A lowered rate of inflation indicates lower demand, which means that people are being very cautious with their money till policy conditions can be judged again after the elections.
“Uplifting the domestic demand and resolving the issues in the strategic sectors like aviation, power and banking and non-banking financial companies becomes imperative as risks from slowing global economic activity and trade can be difficult to circumvent,” said Arun Singh.
D&B expects the CPI inflation to be in the range of 2.7-2.9 percent and WPI inflation to be in the range of 2.8-3.0 per cent during April 2019, respectively.
CPI, which stands for Customer Price Index, is an indicator of demand among customers, while WPI, which stands for Wholesale Price Index, indicates the same for businessmen.
As we can see, both groups are being very cautious as of now. According to the report, while there is a reversal in the rate of food prices in general, moderating inflation in the core sector is going to keep the overall inflation low.
Since agriculture is the backbone of the Indian economy, any report on economic conditions would be incomplete without checking in there.
India depends mainly on two planting seasons, kharif and rabi, which are both heavily monsoon dependent. With the strengthening of El Nino conditions, rainfall might be affected in June and July, the monsoon season, causing the inflation in agriculture (i.e non core) sectors to go up again.
But hopefully, by then, elections results will ease the stress on the economy.
While things may seem uncertain now, we’ll have to wait and see after elections if this trough continues.
Inevitably, election results are going to stabilize the rates of inflation, and policy areas are going to become more clear.
Still, it would be a wise idea to hold back any major investments till the RBI announces its official rate (which is likely to be slashed) after the next meeting of the Monetary Policy Committee (MPC), which is scheduled on 3-6 June.
Disclaimer: The views expressed in this post are that of the author and not those of Groww