Clearly, the next government at the centre, irrespective of its formation, will have some tasks spelt out
December is the season for cheer, goodwill and the customary sport of crystal-ball gazing. Myriad institutions weigh in on what is expected over the next 12 months in terms of global economic growth, trade climate, financial flows and how various asset classes are likely to behave. Risks are listed every year with unerring regularity and, as William Coen, secretary-general of the Bank for International Settlements, recently said: “…there is no shortage of risks in the financial system today, and the likelihood of a future financial crisis occurring only increases with time." So, in keeping with the hoary December tradition, here is a brief account of some risks likely to emerge in the coming months.
The first risk is the possibility of upheavals in political configurations across the world. Among the emerging economies, Argentina, India, Indonesia, South Africa and Nigeria are headed for elections in 2019, as are Canada and Australia, among the developed economies. Argentina’s elections should be interesting, in light of its continuing economic crises and the recent emergence of strongman-politics in neighbouring Brazil. Even Australia’s election promises to create some ripples, with some voices protesting against the country’s liberal immigration policies, a key ingredient in its recession-free run for 27 years.
In India, pre-poll mobilisation is likely to create social imbalances and turmoil. On the economic front, a combination of factors is expected to influence India’s general elections, likely to be held in April-May 2019—the lingering effects of demonetization and the hastily introduced goods and services tax (GST), belied promises of increased employment opportunities, rural distress arising out of a persisting farm crisis and a credit crunch affecting asset creation, among others. The November round of the Consumer Confidence Survey, conducted by the Reserve Bank of India (RBI), reflected an enduring and deepening gloom over issues related to employment potential and household spending.
Recent data releases seem to validate these concerns: Gross domestic product (GDP) for the July-September 2018 quarter slowed to 7.1% after accelerating for four quarters. The deceleration seems to have been occasioned by, among other things, slowing consumption demand, particularly in the rural areas due to depressed farm realizations and near-stagnant rural wages.
As a response, the government announced an agricultural export policy, which, in typical fashion, is strategy-light but heavy on generalities. Overall exports have been slowing, affecting the GDP print.
The only bright light is an uptick in government consumption and investment in public projects (such as infrastructure), which is likely to result in demand stimulus only after a lag. The question is: Will it be in time before the general elections in April-May?
Anti-incumbency pressures may tempt the government to adopt an expansionary fiscal policy, exacerbating the slippages already taking hold. By October-end, the actual fiscal deficit had already shot past the budget figure. In addition, weak harvests from both the rabi and kharif crops could fuel rising food prices, forcing the Reserve Bank of India to attempt a rate hike in line with its stance of “calibrated tightening". The central bank’s monetary policy statement of 5 December warns that food price deflation of the past couple of months might be transient and “…there is a risk of sudden reversal, especially of volatile perishable items".
Interestingly, a number of institutions—Goldman Sachs and Moody’s, among them—also foresee interest rate hikes in India during 2019.
The world, of course, will not wait for a new government in India to stabilize the economy. Major shock waves are expected to continue battering the Indian economy in 2019, with three clear identifiable sources of instability. The first is the US Federal Reserve’s normalization of its monetary policy and its wash-effect on emerging economies, including India. Although there has been some dampening of Fed rate hike expectations, the risk remains as the US economy balances record low unemployment and a closing of the output gap.
The second source of instability is likely to be the play-off between the US’s shale oil production and the new production cuts arrangement initiated between the Organization of Petroleum Exporting Countries (Opec) and Russia. The agreement calls it “stabilizing the market", but any coordinated production cuts and its subsequent impact on crude prices, is a recipe for economic instability. Even though Opec has publicly recognized India’s concerns at its last meeting, other overwhelming priorities might eventually triumph.
The final risk for India is the collapse of multilateralism and world trade. For example, India seems to have gained little from G20 leadership summits, which are slowly turning into chat-fests; the only gainer seems to be the US, which has lost interest in the grouping after experiencing economic growth. The rising tide of trade protectionism and the World Trade Organization’s ineffectual role will also have a direct bearing on India’s slowing exports growth and increasing imports, which in turn is dampening aggregate demand and, thereby, GDP growth print.
There seems to be a consensus among all institutions that India’s GDP might take a slight knock in 2019. Clearly, the next government at the centre, irrespective of its formation, will have some tasks spelt out.
Rajrishi Singhal is consulting editor of Mint. His Twitter handle is @rajrishisinghal.