Political uncertainty is finally behind us. The BJP-led National Democratic Alliance (NDA) won a decisive mandate, clearing the path for a second term for Narendra Modi. This also means continuity of policy and opportunity to push tougher reforms particularly – land and labour.
Challenges and outlook
The economy is going through a cyclical downturn. The GDP growth in the second half of 2018-19 had fallen to ~6.5 per cent – below the trend rate of growth of India (7 per cent). Consumption demand, which was the bulwark of the economy, has weakened and private investment is yet to show signs of a pickup. We see monetary policy turning more growth supportive and expect 25 basis point rate cut in June policy.
Over the next quarters, the Indian economy should gradually recover from current lows. Benign inflation, low interest rates and income support to small farmers will also help growth.
As consumer demand improves gradually, capacity utilisation will increase and private investments in select sectors would inch up. But a material change in the private capex cycle is unlikely this fiscal due to ongoing deleveraging.
CRISIL base-case forecast sees GDP growth rising to 7.3 per cent in fiscal 2020 from 7.0 per cent in fiscal 2019. It is premised on yet another spell of normal monsoon and average crude oil price at $65-70.
A below normal, or ill-distributed, monsoon, or a spike in oil prices, will dampen growth outlook.
Agenda for the government
That the new government would be well served to take following steps urgently:
- Bite the bullet in the first year itself to reap rewards later. Take long-pending hard decisions in the first year itself. Create fiscal space for infra spending, privatisation, asset monetisation and generally unshackle funding in the economy.
- Destress the financial sector, for faster credit growth - a) Speed up the resolution of asset quality problems for public sector banks. Non-performing assets of public sector banks are peaking out, yet they remain quite high at close to 10 per cent of advances. b) Improve their operational efficiency of public sector banks. c) resolve the stress in the Non-bank Finance Sector (NBFC).
- Step up implementation of already announced reforms to fuel medium-term growth. Goods and Services Tax (GST) and Indian Bankruptcy Code (IBC) are works in progress, and they need to be streamlined further to reap full benefits.
- Address farm distress by creating well-functioning markets, improving productivity and cutting waste. A timebound programme to achieve these needs to be communicated.
- Take steps to enhance the competitiveness of India’s exports. If the US-China trade war continues for long, it could result in shift of production bases and restructuring of global supply chains. To gain from this, India needs to improve its investment attractiveness and competitiveness.
- Land and labour reforms are tough nuts to crack, but must be done. The government should begin the process of creating census by taking on board all states and stakeholders. The same approach will come in handy to solve the power sector logjam.
- To speed up employment generation, the government needs to focus on: a) policies that support manufacturing sectors with large employment-growth potential so that, despite slipping labour intensity, absolute employment continues to increase. Such sectors would include textiles, leather, gems and jewellery and construction. b) Labour-intensive services such as health and education. This will not only create jobs as health, education and construction are highly labour intensive, but also raise India’s growth potential by making the workforce healthy and skilled or educated. c) Preparing the youth for new job opportunities and skilling for newer forms of jobs that are created due to rapid adoption of technology.