General elections to guide growth in 2019

Like in football, the Indian economy is likely to be the game of two halves in 2019 with general elections and the related volatility dominating the first and, a fairly stable climate and a renewed focus on reforms influencing the second.

A perceptible weakness in the developed world, trade wars, rupee gaining in strength due to dollar weakness and crude coming off its highs will likely lend strength to equities, exports, and financials.

On the macroeconomic front, the fear of Centre breaching the fiscal deficit target and downside risk to tax revenues may get aggravated further by the pre-election largesse that the Centre is contemplating in the form of direct transfer of funds into accounts of farmers. But rollover of certain major subsidies, especially oil and food, could see them somehow clutching on to the fiscal deficit target. However, it will come with a cost to the Exchequer next year.

Investors, both foreign and domestic, will, however, look for a strong government at the Centre or a stable coalition, which continues to press the reforms peddle and a definitive monetary policy framework will play. If crude oil remains range bound and the rupee strengthened, foreign institutional investments will gather pace and emerging markets will continue to cash-in on the weakness of their developed peers in the better part of 2019.

“Current macroeconomic conditions and valuations are quite supportive and drive our expectations of decent (10-15%) equity returns in 2019. The market is reasonably valued although the reasonable valuations reflect strong earnings revival over the next two years,” Kotak Mahindra Bank said in a note.

It said, the Rupee appeared to be fairly valued and saw a mild depreciation in 2019 compared to the sharp correction last year. The silver lining is also the direct tax collection, which is much better than the projections for this year and the Centre is confident of collecting Rs 11.5 lakh crore on this front in 2018-19.

Divestment target

Disinvestment, with a whopping target of Rs 80,000 crore could have posed problems but big-ticket share sales including ONGC’s acquisition of HPCL, CPSE ETF, Bharat-22 ETF, and Coal India stake sale, along with
6 initial public offerings (IPO) brought Rs 77,417 crore to the exchequer.

Coming fiscal year, the Centre has lined up Air India for sale that can give it good money but analysts have raised questions over the way the successive governments have conducted their divestment programme -- with one public sector entity buying another and reflecting it as revenue on the accounts of the government.

“They are going to cross their disinvestment targets. They will also delay the payments to the Food Corporation of India..... And if they aren’t able to do this they will dig into the RBI reserves,” Govind Rao, member of 14th Finance Commission, said.

Banking sector reforms will continue to be the focus next year and with IL&FS scare behind, the Reserve Bank of India will have to do a lot to bring non-banking finance companies back on the track. The new Governor of RBI, Shaktikanta Das, has already promised to ease liquidity for the small-scale sector and has given permission for loan restructuring of up to Rs 25 lakh for MSMEs.

If the capital infusion by the government is able to lift at least four or five banks out of Prompt Corrective Action framework of RBI, lending to productive sectors of the economy will restart on a strong footing.

Economic growth outlook

On the economic growth front, the outlook appears positive in 2019 with GDP poised to grow around 7.4%. This will keep India’s tag as the world’s fastest-growing economy intact. But the questions will continue to be raised on the credibility of these numbers after GDP back series data gave a sense that the government was manipulating previous years’ growth numbers just to show itself in good light. On the inflation side, a fall in consumer price inflation, especially due to food prices brought a spell of good news for urban consumers, may also give headroom to RBI to lower interest rates but it was not all that good for rural India. Lower food price inflation erodes incomes of farmers as they get a lesser price for their produce. This also impacts rural demand heavily.

Non-food prices, however, continued to climb with housing, fuel and miscellaneous categories of goods and services moving up. Care Ratings said non-food inflation will be an important factor that the RBI will follow closely in its February monetary policy review.

On the positive side, a decline in inflation helped attract capital inflows as it kept India’s real interest rate one of the highest in emerging markets. The real interest rate is the difference between the RBI’s repo rate and consumer price inflation. A major blow to the economy came from a report released by Centre for Monitoring Indian Economy (CMIE) in the new year. The report revealed that investments in new infrastructure projects in India were the 14-year low at the end of 2018. But, it majorly red flagged private investments. Government investments, it said, were likely to pick up again post elections when infrastructure investment picks up the pace once again.

Among key infrastructure sectors, cement and steel performed well through an influx of demand from the road sector. Going forward, economists suggested that a slowdown in China may spell good news for India as it can capture much of its manufacturing space. According to legendary investor Mark Mobius, China’s slowdown and at the same time India’s consumption boom is favourable for markets.

Optimists also opined that trade war between the US and China too provided an opportunity to India in terms of capturing their export markets. Chinese cotton imports from the US is already showing signs of a shift to India. But an analysis of states’ finance, however, suggested that their deteriorating health could prolong after massive flooding in Kerala and in parts of Karnataka and the cyclonic storm that hit Tamil Nadu. This may lead to these States incurring additional spending on rehabilitation work leading to their revenue expenditures exceeding the budgeted levels.