What to expect in 2019, Economy: Some gains likely in poll year, but don’t count on growth spurt yethttps://beta.indianexpress.com/article/business/what-to-expect-in-2019-economy-some-gains-likely-in-poll-year-but-dont-count-on-growth-spurt-yet/

What to expect in 2019, Economy: Some gains likely in poll year, but don’t count on growth spurt yet

Gains from GST and insolvency code will begin to accrue, but may not immediately translate into higher growth rates. The impact of the new government’s decisions will take a while to show. Major worries remain at home and abroad. Expect volatility in the stock markets.

2019 looks like a lacklustre year, presenting a weak outlook for the economy, and more volatility in the stock markets.

The New Year will probably have a few things going for the Indian economy, even though these may not translate into higher growth. Gains from big legislative reforms such as the Goods and Services Tax (GST) and The Insolvency and Bankruptcy Code (IBC) will start accruing in the coming year(s). Lower global crude oil prices — of $50 or so a barrel — will certainly help. But a powering down of the global economy will restrain India’s manufacturing and services exports. Double-digit growth rates became possible in the past only when exports jumped during periods of high global growth. Despite higher capacity utilitsation, companies may go slow on investments due to policy uncertainty in an election year, and banks grappling with bad loans will still find it difficult to lend. There is limited fiscal space for extra government expenditure over the next three months. On the other hand, subdued farm incomes and the wearing off of Pay Commission awards may dent the consumption story. Pre-election noises promising unemployment allowances and farm debt waivers point to rising stress on the fisc, both at the Centre and in the states. Added to this are global uncertainties. Overall, 2019 looks like a lacklustre year, presenting a weak outlook for the economy, and more volatility in the stock markets.

However, it is important to acknowledge that significant reforms have their own journey time; it takes a number of incremental improvements, and letting these play out, to generate confidence and prepare stakeholders for the big transformation. Enacting the GST and IBC laws is no mean achievement, but they were in the making for long. The seeds of GST were sown in 2000, and insolvency reforms have been in the works since 1992. For the economy to start realising the gains from the two reform measures requires these to stabilise and consolidate on the ground. In mature economies, most insolvency cases are resolved outside the courts. India will get there in good time. The impact of these measures will be immense, and will be felt in the medium to long term.

In any election year, three or four crucial months are lost because there is no concerted expenditure push by the government. Bound by the Model Code of Conduct, the government will be able to present only a Vote on Account (also called Interim Budget) which allows for basic spending for a part of the year. Once the new government is sworn in, it takes about a month to present the full Budget, which symbolically also serves as its first big economic policy statement. In other words, the April-June quarter will just pass by, in elections and government formation.

By and large, economic momentum in the short run has little to do with politics. Whether it is the BJP-led NDA or the Congress-led UPA or a non-BJP, non-Congress Third Front, India’s reform path is more or less set. The action shifts to the markets, which are influenced by the moods and expectations of the people given the economic conditions, the promise that political parties are seen to hold (or not hold) ahead of elections, and the uncertainties, if any, the election results throw up. High growth rates are critical for jobs, and political parties are almost always keen to spend more, seek lower rates of interest on loans, demand more lending by banks for micro, small and medium enterprises, and hunt for avenues to raise funds (from RBI reserves, cross-selling of government holding by PSUs, etc).

In 2014, Narendra Modi promised development, an end to the so-called policy paralysis, a revival of investments, growth and jobs, and a war on corruption. The markets couldn’t have asked for more. Over the last four years, the government under Prime Minister Modi has launched many programmes and new schemes, but by and large, it has expanded its role in the economy. Be it directing credit, demanding forbearance for particular sectors, merging state-owned banks, asking oil PSUs to buy government holdings in each other, increasing taxes on fuel despite a sharp drop in global crude prices, or spending money on large welfare programmes, the government has shown a preference for state-led interventions over market solutions. But this hasn’t helped boost private sector investment, critical for job creation. While there is no credible employment data available, the economy has clearly been unable to provide income-earning opportunities to the million-plus individuals who enter the labour market every month.


If the BJP returns to power, it will have to do better to put the economy in a different growth orbit, so that more jobs are created. Will the Congress propose anything dramatically different? Party president Rahul Gandhi’s mocking of the NDA government as a “suit-boot ki sarkaar” and, more recently, promising a nationwide farm loan waiver, send out a certain kind of signal. The new Congress governments in MP, Rajasthan, and Chhattisgarh have already announced farm loan waivers.