India’s path to become fifth biggest economy rife with pitfalls

India’s economy grew at a faster pace than most major nations in 2018, and this year, it’s poised to overtake the U.K. to become the world’s fifth-biggest. But that journey won’t be smooth. The outcome of a general election due by May is a potential pitfall for a nation already battered by emerging market turmoil and a currency rout last year. Also, any attempts by the government to undermine the central bank’s freedom and raid its surplus capital may spook investors and carry damaging consequences for the economy.

India’s path to become fifth biggest economy rife with pitfalls

Here are the key themes to watch for in 2019:

Global Slowdown

Nomura Holdings Inc. estimates global growth will ease to around 2.8 percent in 2019 from 3.2 percent in 2018, led by a slowdown in China, and a moderation in the U.S. and euro-area toward long-term trends. “As cyclical impulses become less favorable, we expect exports, manufacturing and the investment cycle to weaken” in India, Nomura analysts said.

Monetary Policy

After raising interest rates twice last year, 2019 may see the Reserve Bank of India reverse course by giving up its hawkish monetary policy bias in favor of a neutral stance. With demand slowing and oil prices easing, inflation is expected to average toward the RBI’s medium-term target of 4 percent in the first quarter of 2019. The six-member monetary policy committee may even be in a position to lower interest rates in the first half of the year, according to some analysts.

Shaktikanta Das, the new central bank governor, is seen as more dovish on monetary policy, saying inflation is benign and supporting growth is part of the RBI’s focus. His predecessor, Urjit Patel, who unexpectedly quit last month, took a more cautious approach on price growth.

Interest-rate cuts could give a boost to lending and growth before the general election.

Election Risks

With the world’s biggest election around the corner, Prime Minister Narendra Modi is under pressure to boost spending, especially to help farmers, to shore up voter support and spur an economy that’s starting to slow. Data for the three months through September showed growth eased to 7.1 percent from the 8-plus percent pace seen in the previous quarter.

Spending pressures intensified last month following disappointing results for Modi’s Bharatiya Janata Party in regional elections, and farm loan waivers announced by the opposition Indian National Congress party in three states it won from the BJP.

The government is said to be studying three options, including a cash handout for farmers, to ease the distress for farmers and to shore up popular support ahead of elections. It’s already slashed taxes on some goods and services and announced exemptions on pension withdrawals to appease voters.

These are in addition to programs for guaranteed crop prices and healthcare, the full impact of which will be known only in the budget, due to be delivered on Feb. 1.

With the government already exceeding its budget deficit targets in October, any additional measures will need to be balanced with possible reductions in spending to meet the fiscal goal of 3.3 percent of gross domestic product for the year through March.

A loss for Modi in the general election is a risk in terms of policy continuity, and investors are watching the events closely.

Sonal Varma, chief India economist at Nomura Holdings Inc. in Singapore, expects the government to be in limbo until a new administration is in place in May, posing a drag on spending growth in the first half of 2019.

source: livemint


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