An economic slowdown could be bad news for India. It could stymie the nascent recovery in gross fixed capital formation (GFCF) seen in the last couple of quarters
One set of elections is over. The results have confounded many. Psephologists are still trying to make sense of what happened and why. Few are willing to take bets on what the eventual electoral verdict will be in the 2019 general elections. Likewise, few are willing to take bets on the economy.
In three separate warnings in the last month, global rating agency Fitch Ratings, has pointed to a slowdown in the Indian economy, albeit after a slight rise just before the elections, and slowing capital inflows.
The rating agency cut India's FY19 GDP growth forecast to 7.2 percent from 7.8 percent. It has also cut growth forecasts for FY20 and FY21 to 7 percent from 7.3 percent and 7.1 percent from 7.3 percent, respectively.
This is part of a wider global slowdown. The agency said that global growth is slowing down, and "becoming less well-balanced, while downside risks are rising, particularly for 2020." Its chief economist Brian Coulton warned that although the world economy is still expanding at a rapid pace, "cracks are starting to appear in the global growth picture... Eurozone growth outturns have disappointed once again, world trade is decelerating and the China slowdown is now fact, not forecast."
In another release, the ratings agency warned that "capital flows to large emerging markets (EMs) are expected to remain subdued as a share of GDP over the next couple of years due primarily to Fed tightening."
An economic slowdown could be bad news for India. It could stymie the nascent recovery in gross fixed capital formation (GFCF) seen in the last couple of quarters. As it is, India faces the problem of very poor enforcement of contracts. On top of that, it is already on the watch-list of most developed countries for refusing to allow them recourse to international arbitration with a seat outside of India. These factors act as dampeners for foreign investment.
What is all the more worrying is that India's economy faces a problem of cyclicality, as Ambit Research points out. Except for services, both manufacturing and agriculture – which employ the largest numbers of people in India – have witnessed a downturn.
What is even more worrying is that the coming elections could worsen this downturn. As Ambit Research points out, India's GDP has invariably fallen after the elections. That makes sense. Governments tend to pull out all the stops just before general elections to woo voters. The coffers are near empty when elections are over. And as the country staggers to regain its balance, the first year goes by with little additional money to spend. The swiftness with which a new governor was appointed at the RBI indicates that the government will use some of the RBI’s reserves for its welfare programmes and agricultural loan waivers. Whether this will result in a consumer purchase boom has to be seen.
But after the general elections are over, there could be trouble. If India's planners are not careful, there could be a lot of pain for its people in the coming year.
One possibility – enjoy the sunshine while the government splurges money before the general elections are announced. Option two: start planning with sensible economic policies right away. Option three: prepare for a bumpy flight ahead.
No prizes for guessing the right answer.The author is consulting editor with moneycontrol.comGet access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.