The Cheat Sheet

Why visibility is poor at the dawn of 2019

Venky Vembu | Updated on January 02, 2019

Must be the fog, right?

Atmospheric conditions, particularly in the northern Indian States, have of course greatly diminished the distances up to which the human eye can discern objects. But I had more than terrestrial condensation in mind.

What then?

I meant that economists are having a tough time peering into the crystal ball and giving a sense of what lies ahead for the Indian and global economies in the New Year.

Why is that so?

Let’s just say that there are too many curve balls this year, which have the potential to enhance the elements of uncertainty and throw a spanner in the works.

Ah, a mash-up of metaphors. You must really be upset!

Very droll. I bet you won’t be laughing for long.

Okay, hit me with the bad news.

Let’s begin with matters at home. Some economists reckon that the short-term outlook is pretty grim, and that India could see GDP growth dip to less than 7 per cent — and more specifically, to 6.6 per cent, in 2019.

That’s brutal!

You bet. In fact, in their estimation, growth could worsen to about 6.2 per cent in the second half of 2019 before recovering to 7.2 per cent in Q4 2019.

Why would that happen?

That’s where the plot thickens. Economists with this bearish view cite four “headwinds” that could impede growth in India: A tightening of bank credit, given the persistence of liquidity problems, and the turmoil among non-banking finance companies (NBFCs); a strain in Central government revenues owing to lower tax receipts, which could crimp public spending; a cyclical global slowdown, led by China; and the uncertainty that the general elections, due by May 2019, could usher in in the event of an indecisive verdict.

But elections inject money into the economy, right?

Perhaps, but that kind of spending is like getting a ‘sugar high’; not all of it is ‘healthy’ or productive. And then again, the nature of the election results will have a more long-term impact.

What does the electoral landscape look like?

These are early days, of course, but the emerging consensus among political pundits is that the BJP-led NDA government may fall short of an absolute majority.

The crystal-ball gazers at Nomura Global Economics, for instance, see only a 20 per cent chance of a “good” outcome for investors, where the BJP secures over 272 seats, and the NDA returns to power.

On the other hand, they see a 55 per cent chance that the NDA wins, but with the BJP losing its absolute majority; that, in their view, is a “good-ish” outcome. A Congress-led non-BJP coalition stands a 15 per cent chance of coming to power (a “bad” outcome); whereas an “ugly” outcome — of a Third Front of non-BJP parties coming to power — has a 10 per cent chance.

Hmm. What else should I know?

Economists believe that the external environment will worsen in the first half of 2019: global GDP growth, for instance, is expected by some estimates to slow down to 2.8 per cent in 2019 from 3.2 per cent in 2018. Exports, manufacturing and the investment cycle are expected to weaken.

You’re a killjoy, you know?

Well, if it makes you feel slightly better, it’s worth recalling what the economist Ezra Solomon once said. “The only function of economic forecasting,” he noted, “is to make astrology look respectable.”

A weekly column that helps you ask the right questions

Published on January 02, 2019

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