Outlook For The Indian Economy In 2019 A Panoramic Overview
India is the sixth largest fastest growing economy in the world with a nominal GDP of US$ 2.61 trillion. Its steady rise as an emerging economy, combined with the monumental changes by way of businessfriendly policies, structural reforms and transparency in governance, has attracted significant global attention. Read on as we delve deeper into the nitty-gritties of the Indian economy in order to ascertain its prospects and outlook for 2019.
Pressure Points
Robust global economic growth, particularly in the US, has created an imbalance in emerging markets and exerted pressure on their currencies. India has succumbed to these stresses to a certain extent owing to rising crude oil prices and monetary tightening. Furthermore, the Indian rupee weakened throughout 2018 and dropped sharply to an all-time low of RS.74.39/USD by mid-October 2018. Quantitative tightening by the US Fed, FII outflows (net RS.99,496 crore in 2018) and weakness in the emerging market currencies contributed to the rapid downward spiral of the Indian rupee. These factors widened India’s current account deficit (CAD) and hampered demand on the domestic front. However, crude oil prices corrected sharply by 40 per cent in recent months in anticipation of feeble global demand. This helped in alleviating pressure on the Indian rupee, which recovered 5 per cent in the past couple of months. Consequently, the pressure on the CAD was allayed to an extent.
GDP Growth Prospects
According to the rating agency Moody’s, the growth of the Indian economy is expected to moderate to 7.3 per cent in 2019 and 2020 from 7.4 per cent in 2018. Union Finance Minister Arun Jaitley has committed to meet the fiscal deficit target of 3.3 per cent of GDP in 2018-2019, even in the face of substantial revenue shortfall and populist demands in the election year. The Central Statistical Office (CSO) has estimated the nominal GDP growth to be 12.3 per cent for 2018-2019 against the Ministry of Finance’s assumption of 11.5 per cent for the same period. This will help the government meet the fiscal deficit target of 3.3 per cent of GDP, in spite of the shortfall in revenue. Even on the global front, the GDP is expected to ease to 3.5 per cent in 2019 and 2020 from 3.7 per cent in 2018. The concerns pertaining to emerging market contagion and the US-China trade war rhetoric are the key pressure points.
The financial sector is the biggest concern as some NBFCs are in hot water due to the protracted liquidity crunch, which could further create a sharper slowdown in their credit provision. Borrowing costs have escalated on the back of rising interest rates. As a result, the RBI may progressively increase the benchmark rate through 2019 – a decision that could further subdue domestic demand. The appointment of the new RBI governor is sure to have an impact on the economy.
The market expects RBI governor Shaktikanta Das to assume an accommodative stance pertaining to matters concerning the banking sector. He is likely to relax the regulations with respect to higher liquidity, PCA framework and dilution of promoter ownership rules. The market also anticipates a more liberal monetary policy with the possibility of a rate cut based on RBI’s recent dovish stance. Based on the IMF World Economic Outlook, the growth of the Indian economy is expected to surpass that of China in the near future, particularly due to PM Modi’s policies pertaining to GST implementation and the Insolvency and Bankruptcy Code. The numerous market liberalisation measures assisted India’s ascent in global rankings, including Word Bank’s 2017 ranking of “ease of doing business”. Correspondingly, India climbed 20 points in the past four years in the World Economic Forum’s (WEFR) Global Competitiveness rankings.
Globally, growth is expected to decelerate owing to tightening liquidity and elevated trade tensions. Moody’s expects global growth to drop under 2.9 per cent in 2019 and 2020 from 3.3 per cent in 2018 and 2017. When we look at how some of the emerging economies like Brazil, Mexico and South Africa are faring in comparison to advanced economies, we can see they have been underperforming relative to their growth potential. On the whole, Moody’s predicts the real GDP growth in G-20 emerging market countries to plummet to 5 per cent in 2018 from 5.3 per cent in 2017. Based on the long-term forecasts shared by Standard Chartered Plc by taking into account purchasing power parity exchange rates and nominal GDP, China is likely to become the largest economy in the world by 2020, while India is likely to surpass the US by 2030.
According to them, the trend of GDP growth for India will surge to 7.8 per cent by the 2020s, while China's will moderate to 5 per cent by 2030, thereby reflecting a natural slowdown considering the economy’s size.
Unemployment and Low Per Capita Income
Ironically, and rather alarmingly, while the Indian economy is scaling upwards in the coveted list of the world’s largest economies, a majority of Indians are not necessarily gung-ho about their living standards. Underneath India’s economic growth lies a perplexing unemployment crisis. Despite improving GDP growth rates, the correlation between growth and employment generation has eroded disturbingly over time. As of today, unemployment stands at 16 per cent among the highly educated youth. Between 2013 and 2015, total employment contracted by seven million! There was a time when India’s struggles were restricted to underemployment and low wages; however, the problem of unemployment and declining job growth has plagued the country’s citizens. Furthermore, even the jobs that exist do not essentially pay adequately. For instance, the wages paid to low-skilled labour declined to RS.10,300 per month in 2018 from RS.13,300 per month in 2014. The dearth of high-paying jobs is a grave concern, especially since labour productivity has improved. Based on a report by Azim Premji University’s
Centre for Sustainable Employment, on an average, 82 per cent of male and 92 per cent of female workers earn less than RS.10,000 a month. This starkly exposes India’s harsh income inequality. Since a vast majority of Indians do not earn what may be termed a living wage, the harsh scuffle to land government jobs is not entirely surprising.
World GDP Rankings
There is an ongoing tussle between France and India to secure the sixth position in the world GDP rankings. India succeeded in unseating France toward the middle of 2018, but France managed to recover its position in November 2018. Nevertheless, India is now back at the sixth position and is well on its way to unseat UK to attain the fifth position in 2019, as per IMF projections. Despite these outwardly convincing statistics, a glance at the per capita income numbers will wake us up to a grim reality. While India’s estimated per capita income is US$ 7,060; France's per capita income is US$ 43,720, which is six times more than India’s paltry number. One might argue that the disparity in per capita income is on account of India’s higher population compared to that of France, as the metric is computed by dividing the total size of the economy with the total number of people in the country. However, that argument is easily erased when we look at China’s ranking at the second position, despite its population being greater than India. Thus, we can infer that while India has undoubtedly gained economic muscle; its development in terms of job creation and income generation leaves much to be desired.
Contributors to GDP
Growth It is observed that the contribution of services to GDP improved to 21.7 per cent in 2018 from 18.9 per cent in 2012. In fact, services were the main catalyst for GDP growth as they contributed 60 per cent to the economy and accounted for 28 per cent of employment. The share of manufacturing dwindled despite government campaigns like ‘Make in India’. Likewise, the contribution of agriculture to GDP growth has weakened over the years. India’s expenditure on information technology is forecasted to reach US$ 90 billion this year, posting a YoY growth of 6.7 per cent. The telecommunication sector is also progressing as Samsung is set to conduct 5G field trials in New Delhi during H1FY19.
Impact of Taxation
Taxes unquestionably have a significant impact on economic performance. The gross tax collection rose 14.1 per cent and advance tax collection registered a growth of 14.5 per cent YoY to RS.3.64 trillion between April to December 2018. The annual target for FY19 is RS.11.5 trillion of which 64.7 per cent has already been collected. The government strives to revisit the tax collection target and looks forward to a 1.5 per cent increase in the tax-to-GDP ratio.
Election Impact
We can expect the Indian economy to be disadvantaged on account of the external sector in 2019. Several structural influences like lacklustre export growth and ambiguity of capital flows will burden the external sector. The imminent elections in April-May 2019 have created an environment of speculation and uncertainty. These elections have also triggered controversial actions such as farm loan waivers and ban on alcohol consumption, which have a palpable impact on economic growth. Needless to say, the impending elections will be dominated by issues concerning farmers' welfare as political parties will be scurrying to solicit rural votes. The government may announce reforms and benefits before the Code of Conduct comes into effect. Regardless of the outcome of the elections, the government impetus to the policies driving affordable housing, job creation and infrastructure development will play out. Based on a comprehensive study of the past four elections, we can say with conviction that the growth of the economy generally improves notably during the election period – a trend that certainly paints a promising outlook for 2019.
Moreover, the Indian economy is also reeling as investments have taken a hit. The lending activities of banks will determine the extent to which the Indian economy will revive in 2019. Owing to the mounting pile of stressed assets, the RBI has intensified its scrutiny of banks. As a result, banks have become extremely cautious about sanctioning loans as they are wary of defaults.
Promising Prospects
Overall, the strength of the Indian economy lies in its limited dependence on exports, high savings rates, advantageous demographics and a burgeoning middle class. Economic growth is expected to accelerate this fiscal owing to faster private consumption and investment growth. The revival in domestic demand is projected to widen the CAD to 2.6 per cent of GDP in 2019. However, the outlook is clouded on account of fiscal slippage in the run-up to the general elections, global trade protectionism and volatility in oil prices. With a tepid scenario on the global economic front, subdued domestic sentiment and a looming election that is bound to bring a coalition government into power, the Indian economy will certainly have to withstand headwinds in order to prosper. Moving forward, the performance of the Indian rupee against the US dollar will depend on three factors, namely, CPI, crude oil prices and global yields. Presently, CPI inflation is contained within the RBI’s policy threshold as food prices have remained benign. The RBI has forecasted inflation to reach 2.7-3.2 per cent in H2FY19 and 3.8-4.2 per cent in H1FY20. However, core inflation is likely to be on the higher side for the next few months, but it will spiral down steadily later on. Brent crude oil prices have fallen to US$ 54/bbl from the 2018 high of US$ 86/bbl, thereby correcting 14 per cent YTD. Owing to the increased supply and waning demand, crude oil prices may well remain passive in 2019.
Although the rupee is stabilising slowly, it will require time for foreign investments to flow into the economy. The ongoing trade war between Washington and Beijing has rendered India as an attractive choice for foreign investors. It is observed that the growth performance of India in comparison to other emerging markets has been quite remarkable.
We can expect the Indian economy to be disadvantaged on account of the external sector in 2019.The imminent elections in April-May 2019 have created an environment of speculation and uncertainty.
According to the rating agency Moody’s, the growth of the Indian economy is expected to moderate to 7.3 per cent in 2019 and 2020 from 7.4 per cent in 2018.
Globally, growth is expected to decelerate owing to tightening liquidity and elevated trade tensions. Moody’s expects global growth to drop under 2.9 per cent in 2019 and 2020 from 3.3 per cent in 2018 and 2017.
The lending activities of banks will determine the extent to which the Indian economy will revive in 2019.
Conclusion
Thus, we can conclude that while the Indian economy is certainly beleaguered with some serious concerns; it has some positives to look forward to as well. Despite being one of the fastest growing economies in the world, the new government will assume power in a less-than-ideal economic environment. As such, it will have to rise to the challenge to in still an environment of stability and growth opportunities to make 2019 and the upcoming years successful.