Despite the good gross domestic product (GDP) numbers for the third quarter of 2017-18 (October-December 2017), we need to be prepared for a bumpy ride in the coming fiscal year.
This is not to deny the revival of economic activity after the demonetisation and goods and service tax (GST) speed breakers. The third quarter GDP figure of 7.2 per cent is encouraging, and the recovery has been broad based. The Central Statistics Office’s second advance estimate of GDP for the year is now up from the earlier projection of 6.5 per cent to 6.6 per cent.
However, it is still too early to cheer, for four reasons: one, January GST collections are flat, at Rs 86,318 crore, marginally below December’s Rs 86,703 crore. This indicates that the economy in the last quarter is not looking any better than in the previous one.
Second, while manufacturing recovery seems robust, the February Nikkei Purchasing Managers’ Index shows a sharp contraction in services. While manufacturing PMI is at a healthy 52.1, services is down to 47.8, and the composite PMI is at 49.7. Any figure below 50 indicates a contraction. This means something went wrong in February, if not earlier.
Third, with the fiscal deficit for April-January already at 113 per cent of the whole year’s target, one cannot rule out a slowdown in government spending in February and March in order to meet the already relaxed fiscal target for 2017-18.
Fourth, banks have already begun raising interest rates, with State Bank of India raising its fixed deposit and lending rates. Other banks (including ICICI Bank and Punjab National Bank) have followed suit, raising lending rates by 10-20 basis points (100 basis points make one per cent). This implies that rates may now start hardening, and this could dampen corporate investments in future.
Most important, the Nirav Modi fraud, which drove a hole of more than Rs 12,700 crore in Punjab National Bank’s balance-sheet, is being followed up by the discovery of other frauds in other banks. This is likely to make banks more cautious about expanding their lending activity. To make matters worse, the Finance Ministry has asked all public sector banks to check for fraud in bad loan accounts above Rs 50 crore. The point is simple: if public sector banks, which account for 70 per cent of the banking system, are suddenly going to be focused internally on which accounts are involved in fraud, the subliminal message they will get is that they must be ultra-cautious in future. This cannot but have a chilling effect on credit growth.
As things stand, as on 16 February 2018, bank credit growth in the financial year so far has been an anaemic 5.3 per cent; while this is much better than the previous year’s 2.9 per cent – a year marked by demonetisation’s disruption – the focus on internal fraud could depress bank lending in the remaining two months of this financial year, and beyond.
This implies that GDP growth in the last quarter (January-March) may not show any further revival, unless a miracle happens.
To make matters worse, the stock markets are now skittish. While our markets are following trends in the US markets, where there is now greater fear of the Fed raising interest rates faster in 2018, a lot of the bearishness is internal – led by the crash in public sector bank shares. This suggests that capital raising from the markets will be more difficult in future, with large implications for the fiscal deficit, as disinvestment proceeds may not remain robust in 2018-19. Finance Minister Arun Jaitley has budgeted for share sales of Rs 80,000 crore next year. The appetite of investors for buying public sector shares may remain muted.
Of course, the biggest uncertainty in 2018-19 will be politics, with major state assembly elections looming in Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh. If these elections show dents – or, worse, defeats – in the BJP’s popularity, the markets will crash further, and remain subdued or volatile all the way to 2019, when Lok Sabha elections are due.
To be sure, growth rates in election years can be beefed up by large private spending by parties and candidates, but this will surely stoke inflation. More so, since the budget has also promised a big increase in minimum support prices, which now have to be 50 per cent more than the cost of production from this year. This could add to the inflationary pressures already building in the economy, forcing a further increase in rates in the coming months. The Monetary Policy Committee, at its last meeting in February, saw at least one member calling for a hike in rates. One can expect a rate hike latest by June, assuming inflation numbers stay high or a rising trend.
An additional worry on inflation is the possibility that the rupee may weaken this calendar. Already the currency is sliding against the dollar, and this could continue for some time. While this is good news for exports, it also means that landed costs of crude oil will be higher, putting further pressure on inflation.
The Indian economy is entering a period of uncertainty and volatility, where its direction will be decided by political developments, over-cautious bankers, inflation trends, the rupee’s direction, stock market inflows (or outflows), and state government decisions on farm loan waivers and sops to various sections of voters.
To top it all, we also have the GST uncertainties, where the e-way bill to combat evasion will be implemented from 1 April (or later). GST may take a few months to settle down, bringing us to the middle of 2018.
It is a very unhealthy mix as far as the economy goes. It means the end result for growth will be unpredictable, with negative consequences for corporate investment decisions. The 2018-19 fiscal is going to be one hell of a difficult year for the economy. But it will also be exciting. So, put on your helmets and get ready for a bumpy ride.
(A variant of this article was first written for DB Post)
Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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