Clouds Are Dark, Grey and Silver

THE FOCUS SHOULD BE ON REFORM AS THE BIGGEST STRESS REMAINS IN AGRICULTURE, POWER AND BANKING.

As we usher in the new year, the economic outlook is cloudy. But these clouds have shades of dark, grey and silver. One can sum it up as cautious optimism – a glass half-filled rather than half empty. Despite several challenges, India continues to be the fastest-growing large economy, with an expected growth of around 7.5 per cent.

First, a look at the dark clouds. Stock markets have taken a big beating, especially in New York and China. The December rout in the U.S. stock market was the worst since the Great Depression of the 1930s. It is all the more remarkable since 2018 was a year of record corporate profits, thanks to the tax cuts announced by President Trump. To top it, more than $1 trillion of those profits were used by the companies to buy back their shares. But it was not enough to prop up share prices. The U.S. economy is in its 11th year of continuous expansion of output and jobs. But too much of debt has piled on. Washington is in lockdown since lawmakers cannot agree to relax the debt ceiling. A slowdown is inevitable if not a recession. And the mood is sombre because of the sabre-rattling and talks of a trade war with China. Nobody wins a trade war. Raising high tariff walls raises prices, hurts consumers and eventually, the industry, and competitiveness goes down. Hopefully, cooler heads and trade peace will prevail. Meanwhile, the Chinese are worried about their own slowdown. Hence, monetary stimulus is contemplated.

What about the silver lining? It has come from the sharp drop in oil prices. A few months ago, it looked like oil could hit $100 per barrel, but it has dropped to $50 now. Oil is one of India’s biggest vulnerabilities. The double whammy of high oil price and weak rupee is behind us. Cheaper oil provides relief to fiscal and current account deficits, leads to lower inflation and increases manufacturing competitiveness. Another silver lining is the foreign direct investment. In 2018, India attracted $40 billion of FDI, overtaking China. Inbound remittance at $80 billion is the world’s highest. Also, the jump from 142 to 77 in the global ranking of ease of doing business must have created a huge interest and pipeline of deals. Telecom and domestic airline traffic has been surging although these are largely profitless due to cutthroat price competition. Lead indicators are suggesting an upward move in industrial investment even though the investment-to-GDP ratio at 31 per cent is still below the 2008 peak. Investment in infrastructure, especially in roads and waterways, has maintained a healthy momentum that will pay off soon. The bankruptcy code and process have yielded handsome gains in terms of value unlocking, recovery of bad loans and bidders gaining control of prize assets. The Goods and Services Tax is converging to a single rate (which should have happened much earlier), and that should help reduce litigation and disputes and increase the buoyancy in collections.

That brings us to the grey clouds. The biggest stress is in agriculture, power and banking. Despite a generous offer of minimum support prices for 22 crops, farmers’ actual income is stagnant and food inflation is in negative territory. The inefficiency of the value chain – from farm to fork

– is inexcusable, with urban dwellers paying five times the price received by farmers. Low farm prices and other woes became manifest in the electoral outcomes of the three states. It led to a spate of loan waivers, which are unbudgeted promises. Loan waivers punish those who repaid, create perverse incentives and deplete the treasury, but these are politically irresistible. However, the new year will witness more focus on reforms in the farm sector. These include the removal of export restrictions, doing away with middlemen constraints, providing access to futures markets and direct income support to farmers. As for banking, the NPA stress will continue. However, the liquidity crunch induced by the ILFS episode is behind us. Again, a deepening corporate bond market is the key. The securitising of receivables of SMEs traded on the TREDS platform is a great step forward. The tweak to Aadhaar Act, allowing for voluntary signing up, should help banking and telecom. The awkward restriction on e-commerce players should go. We now have price controls both from below (deep discounting) and above (antiprofiteering law), which is against the spirit of reforms.

Thus, we head into the election season. And there are enough bright spots domestically in spite of the gathering gloom outside.