Risks on the ground
Sailing the Indian economy will remain challenging for months
Within two months, Asian Development Bank has to make a downward revision to its economic forecast for India for the current financial year by about 0.5 per cent. Asian Development Outlook 2019 update sees some silver lining on the horizon, but did not forget to mention the downside risks on the ground, indicating the sailing Indian economy through the troubled waters to remain tough.
India has landed into this conundrum after the country has slowed much more than expected. India's GDP grew by only 5.0 per cent in the first quarter of fiscal year 2019 with consumption, investment, and production lacklustre. Industry growth slowed in the quarter to 2.7 per cent year on year as manufacturing grew by a disappointing 0.6 per cent. Expansion in services slipped to 6.9 per cent, the lowest rate in 7 quarters.
In July forecast ADB had projected 7.0 per cent growth for India for FY2019, but in the September update of its flagship economic publication, Asian Development Outlook (ADO) 2019, the growth prospect has been stated at 6.5 per cent. The update expects regional growth for Asia to moderate. GDP expansion in the whole is projected to slow. It reflects gloomier prospects for international trade that may worsen already worsening trade deficit.
There has been a slowing trend in GDP of Asian economies in the first half of this year, because exports and investment faltered in many economies across the region, including India, leaving private consumption as the main support for continued growth. ADB's opinion thus gives a dismal picture for India, where the private consumption and demand is at very low ebb taking toll of the economy. There is no money with the people, and pushing the level of demand and consumption up has become an uphill task for the government.
Growth in South Asia is now seen moderating this year as India's economy slows primarily for domestic reason such as the pre-election decline in investment and tighter credit conditions. India's growth forecast has been lowered after growth slowed markedly to 5 per cent in the first quarter, April-June. Abrupt declines in manufacturing and investment reflect uncertainty ahead, subdued lending by banks and other financial institutions, stress in the rural economy, and a weakening external outlook. The report mentions unexpectedly low food prices in India, but that also reflect the deepening crisis in the agrarian sector due to unremunerative prices to the farmer's produce in the backdrop of the assurance of doubling farmers income by 2022.
Downside risks to the region have intensified, with the trade conflict posing the greatest of many risks showing no sign of abating. A rise in public and private debt over the past decade leaves the region more vulnerable to shocks. Substantial fall in investment, domestic consumption and demand, and the value of rupee against dollar are specifically mentioned as problematic areas.
ADB sees a silver lining for Indian economy on the horizon mainly due to expansionary budgets and other fiscal stimulus measures announced recently by the Ministry of Finance. Cuts in policy interest rates have specifically been mentioned. Since January, India has cut interest rates four times. Easing policy rates seems to be appropriate. India seems to have an accommodative stance given the current conditions. As monetary stimulus and government measures to support growth gain traction, growth in India is expected to recover, the update hopes.
The proactive measures announced in August and September promise to boost confidence and foster a rapid recovery, however, it will mainly depend on how much domestic demand grows. Direct income support for farmers may boost rural consumption but it may not be sufficient to upset the losses from the uneven monsoon this year. Urban consumption is expected to improve as cut in policy rates by RBI may lower the cost of borrowing, and lowering the taxes may improve the disposable income with people in cities and town, but only time will tell if these measures improve demand and consumption. The latest corporate tax cut is promising to boost investment and growth and make India more competitive internationally, but all these are time taking.
India may be waiting for external shocks too, mainly on account of escalating trade war. The US revoked zero-duty preferential trade status on $5.6 billion in imports from India. India retaliated with tariff hikes worth $220 million on goods from the US. The economic impact is insignificant for both the countries, but the damage to trade relations meant more discomfort.
Investment scenario in India has been weakening over time. However, blame was put on elections. However, it may also reflect that the businesses were responding to a less rosy external environment. Since both slowing in the advanced economies and trade conflict escalation seem likely to continue, the baseline assumption is that the investment growth slowdown witnessed in the first half of 2019 will continue throughout the year. If growth in investment continues to slow, it will likely translate into less productive capacity going forward which can have discouraging implications on longer-term growth prospects. The main component of domestic demand and consumption too is showing some signs of weakening notably in India, the update warned.
Increasing international prices of crude oil may be another area of concern for India. It may put additional pressure on our growth prospects. Given the scenario, India's economy will have to face very hard times in the coming months. ADB, in between the hope of recovery, warns that the risks to the growth outlook tilt primarily to the downside as the lag between growth-enhancing policy measures and impact on aggregate demand may extend longer than anticipated. A revenue shortfall because of weak economic activity would constrain government spending and further dampen aggregate demand.
(The views expressed are strictly personal )
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