The Indian economy has several pools of uncertainty on an otherwise straight upward path. This was engendered by the oil crisis, trade wars and Federal Reserve action which was then joined by the liquidity crunch which put a second question mark on growth prospects. The real sector hence while looking good as indicated by GDP, IIP and core sector growth, now enters a clouded terrain with the financial indicators being different from what they were till March 2018.
Looking forward, it does appear that GDP growth will move towards the 7.5% mark with a downside risk in case the present liquidity crunch affects prospective investment. Industrial growth would be one of the drivers of the economy with growth between 5-6% for the year. The trend of accelerated growth on account of low base GST effect has gotten diluted and the future growth will be based on higher spending. This has been witnessed in the recent ‘festival sales’ of two leading e-tailers and the important point is whether or not it will be sustained. The festival demand will play out by December while the good harvest-higher demand scenario has to be monitored. The third quarter results of companies will give a clearer picture.
A stumbling block appears to be an investment which on the private sector side has not really caught on. This gets reflected from a lower credit offtake from manufacturing and services as well as bond issuances. The limited investment that is taking place is from the government which is also facing a problem of lower GST collections which can come in the way of balancing the budget entailing curs in capex. The low stock market conditions does not sound good for future disinvestment and with the insurance companies already taking on the role of savior in the financial sector, the ability to also finance this project will get progressively challenging.
The variable which everyone will have to watch out for is oil price. A reversal of direction to the range of around $70 a barrel will bring back equilibrium. Future inflation will be driven primarily by this factor which is also related to the exchange rate which has been stable of late in the 73-74 range but move according to the global waves and current account deficit. While an exchange rate of around $ 70-71/$ looks fair in the present regime, the FPI flows too would have to be monitored along with the CAD. FPI have turned negative with the QE coming to an end and interest rates going up in the USA. This will continue to be the pattern which will pressurize the rupee. This will be the immediate threat for inflation and combined with the MSP driven linkage will mean CPI inflation of above 5%.
High inflation or potential high inflation means that the possibility of RBI lowering interest rates can be ruled out. It will be more of a question of whether or not and to what extent will the RBI raise the repo rate. A 25 bps increase cannot be ruled out this year and it is only the timing that will be a matter of conjecture. This also means GSec yields will be pressurized in the upward direction and move around the 8% mark. The RBI assurance to provide liquidity through OMO is significant as this will keep the rates below the ceiling. Any untoward increase in demand for credit will spell bad news for these yields as also bank investment portfolio. While they would be getting out of the NPA provisioning trap, the hit on investment valuation will be a concern.
Where will all this leave the stock market? Volatility will continue with the Iran crisis, trade wars, domestic Elections, liquidity crunch etc. being the driving factors in successive periods of short runs.
Therefore, the path towards the next year will be cautiously positive with every step being measured and the possibility of slippages in different corners being the downside risk.
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The writer is Chief Economist, CARE Ratings. Views are personal