Over the last few quarters, growth in the Indian economy has been quite robust. The MPC, in its latest policy statement, talked about how growth “surged to a nine-quarter high of 8.2 per cent in Q1:2018-19, extending the sequential acceleration to four successive quarters”. But the macro environment has now changed substantially, throwing a cloud over the outlook going forward.
First, export growth may not be as supportive as people expect. The world experienced a phase of synchronised recovery between 2016 and 2017. Unfortunately India did not fully participate in this growth story due to domestic policy changes including the GST and demonetisation. The issues related to those events are behind us. But now, there is significant divergence now in the growth of major economies. The EU and Japan have started to slow in 2018 whilst the US continues its momentum. Incremental data also points to a slowdown in China which could have a knock on effect on other ASEAN countries. The global rhetoric on tariffs and trade wars are unlikely to help either. Even though the recent fall in currency should give a boost to exports, we do not have a conducive global environment to take the most advantage of it.
Second, on the domestic front, rising oil prices and the depreciation of the currency are likely to have an effect on growth and inflation. The monetary policy report has some guidance in this matter. According to Manas Chakravarty in the Mint:
The MPR also provides some clues and numbers about how underlying factors affect inflation and growth. For instance, it says that a 10% increase in the international price of a barrel of oil for the Indian crude basket is expected to reduce growth by 15 basis points (bps) and push up headline inflation by 20 bps. The price level also matters—the same percentage increase at a higher price point increases the impact on inflation. For example, an increase from $100 a barrel to $110 a barrel could pull up inflation by around 22 bps. Perhaps more importantly in these times, RBI estimates that for every $1 increase in the price of a barrel of crude, India’s current account deficit could widen by $0.8 billion.
How will changes in the exchange rate affect inflation? Says the MPR: “Assuming a depreciation of the Indian rupee by around 5% relative to the baseline, inflation could increase by around 20 bps, while the likely boost to net exports could push up growth by around 15 bps.” On the other hand, an appreciation of the INR by 5% could soften growth by 15 bps in FY19 and lower inflation by 20 bps
The monetary policy statement had taken average price of the crude oil basket to be $80 and a dollar rate of 72.50, both levels which have already been taken out.
Third, the tight liquidity and credit scenario will also mean NBFCs will be unable to lend very aggressively. The public sector banks are awash with the NPA mess and would be unwilling to lend more and therefore the growth in credit would largely fall to private sector banks. Unfortunately, while these banks would pick up some of the slack, they would not be able to offer the same products and terms as the more aggressive NBFCs. Hence credit growth and therefore demand will likely moderate.
Finally, capital flows have been drying up, with net FPI turning negative both in the equity and debt segment. Additionally, GST revenues have been lower than projected and the government is struggling to meet its fiscal deficit targets. This means that we are staring at a balance of payments problem which would prove to be a dampener on aggregate demand and hence growth.
All in all, this points to an environment which is not conductive to growth going forward.
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.