Will India’s Economy Slow Down Sharply in 2019?
‘’When anyone talks about India, it is a positive story. It’s among the top two emerging economies, one of the most popular destinations for FDI. Rising India means moving from darkness to light.
Rising India is not just strength of economy or rise in the stock market or record foreign investment. For me, Rising India means the rise of the people’s self-confidence. Once that happens, the impossible becomes possible’’- Narendra Modi
An EM Phenomenon?
Globally, emerging economies are going through a rough patch.
India has not been entirely immune to this global phenomenon. As per recent RBI data, GDP registered in Q3 till date stood at 6.6% as against a higher 7% in Q2 and a robust 8% in Q1 2018-19 respectively.
This is also the slowest pace in the last five quarters. Economists surveyed by Reuters were predicting GDP growth of 6.9%. Further, with escalating trade disputes and rising oil prices, the moderate growth is expected to continue till Q2 2019-20.
A cause for worry is that the global slowdown might hurt the manufacturing sector, especially auto, engineering, textile and other labour-intensive sectors.
According to estimates by CMS, a Delhi-based think tank, the political parties are likely to spend nearly INR 500 billion towards election campaigning.
The increased election spending is likely to be offset by global economic uncertainties and the political risk surrounding elections in India.
‘’ We don’t expect any election-spend related upside to growth for the next two quarters’’- Soumya Kanti Ghosh, Chief Economist, SBI.
While the numbers per se are not cause for worry or concern, the strong pro-business approach and implementation of a slew of positive economic policies by the NDA Government, had expectations running high.
Picking up the trends from the economic indicators, the government has slightly lowered the projected GDP to 7% for Q4 2018-19, a tad slower than the initial estimate of 7.2%.
Bright Spots in the Economy
Gross fixed capital formation, which includes infrastructure spending on roads, ports, airports and power plants grew to 10.6% compared to 10.2 % annual increase in the previous quarter.
The manufacturing sector grew at 6.7 % annually, while services, including construction, registered 7.6 % annual growth.
The bright spots in the economy, which are likely to register a growth rate of over 7 percent are construction, public administration, defense, and other services, manufacturing, electricity, gas, water supply, and other utility services and financial, real estate and professional services.
The Biggest Political Event of 2019: General Elections
With the general elections 2019 around the corner, it is in expected lines for the government to adopt populist measures.
This might bode well for the economy if the money from the schemes is channelized properly and reach the correct beneficiary. The increased fiscal spending would translate into an increase in the purchasing power of the middle class and the rural population, especially the farmers.
India has been battling a farm crisis for long with declining farm income and crop damage from natural calamities and uneven rainfall.
This step, along with direct cash transfers, comes as a solace to farmers, who comprise a significant chunk of the electorate and make up the crucial agriculture sector.
RBI to the Rescue!
It must be kept in mind that domestic spending contributes to over two-thirds of India’s GDP.
Growth in consumer spending, slowed to 8.4% percent in Q3, compared to a 9.9 % increase in Q2 2018-19. To boost domestic demand in the wake of a global slowdown, RBI might adopt an expansionary monetary policy.
On February 7, the Reserve Bank of India (RBI) cut its policy interest rate by 25 basis points to 6.25 percent and changed its stance to “neutral” to boost a slowing economy as inflation has sharply dipped. The inflation numbers with CPI at 4% allows headroom for RBI to further lower their interest rates.
“We continue to believe that fundamentals do not support any meaningful increase in inflation. Tight liquidity reins in demand-pull inflation. Cost-push inflation is contained by falling commodity prices’’- Indranil Sen Gupta, chief economist at Bank of America Merrill Lynch
A Fiscal Boost
However, the hike in Government spending is expected to be short-lived till the completion of the elections and expected to drop to 13% from the start of FY19-20 as against the current 15%.
This is to curtail the fiscal deficit and to clear the pending bills from the previously announced stimulus packages. Tax and non-tax revenue continue to disappoint with deficit having ballooned to INR 7.71 lakh crore.
For robust economic growth, it is imperative that fiscal deficit is controlled within the expected INR 6 lakh crore at an estimated 3.32% and revenue collections pick up the pace.
Unemployment is a Population Problem
India, with its large, youthful population is facing a serious unemployment problem, especially in the urban regions.
While the Government boost to entrepreneurial initiatives with the start-up India scheme has mitigated the impact to some extent, the burgeoning population continues to exacerbate the unemployment problem.
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It is estimated that nearly 20 million youth enter the job market each year.
Growth vs Inflation Conundrum
The biggest relief to policymakers is that inflation is within reign.
Tackling inflationary pressure, especially for necessities would have made it very difficult for the government.
Having to deal with a dual-headed monster of boosting economic growth as well as inflation-fighting would have been a huge challenge.
Rising India
In conclusion, recent development can be viewed as a speed breaker. India’s growth story is intact and far from over.
“The numbers are not particularly encouraging, but India’s overall growth rate is somewhat close to 7 percent, and it remains the fastest-growing country in the world, which is a little solace as growth is coming down globally’’- Sujan Hajra, Chief Economist, Anand Rathi Stock Brokers.
India is still the world’s fastest-growing major economy, given China’s slowdown in growth to 6.4% in the last quarter of 2018. The theme is not India slowing. The theme clearly is India rising.
Disclaimer: The views expressed in this post are that of the author and not those of Groww