Businesses optimistic about India's economy despite 2019 election uncertainties
The country is preparing for a closely fought general elections in May, with the ruling BJP recently losing control of three key states
Business leaders in India are cautiously optimistic about the new year, despite the recent slowdown in the country's economy and the uncertainty stemming from the general elections due in May.
“The year 2018 is termed as good for the Indian economy, and shall be better hopefully in 2019,” says Niranjan Hiranandani, the senior vice president of trade body the Associated Chambers of Commerce and Industry of India (Assocham), and the managing director of Mumbai developer Hiranandani Group.
The main event on the horizon is the national election in 2019. With the ruling Hindu nationalist Bharatiya Janata Party (BJP) recently losing control of three key states in assembly polls, the general elections are expected to be a more closely fought battle than previously expected. This has implications for the economy and the markets, with some investors likely to be wary until there is clarity on the political situation.
“General elections could add some uncertainty and spice,” says Abhishek Bansal, the founder and chairman of Abans Group of Companies, a financial services group based in Mumbai. “[But] benign inflation, helped by softer crude oil prices, points towards a healthy economic outlook. The coming year is expected to be positive for Indian markets and the economy.”
The economy has lost some momentum over the course of 2018.
India's gross domestic product growth slowed to 7.1 per cent in the quarter to the end of September compared to 8.2 per cent in the previous quarter, official data shows. This was partly due to the impact of the spike in crude oil prices globally and a weak currency.
Nevertheless, many economists' forecasts are upbeat for the coming months.
Acuite Ratings is forecasting GDP growth of 7.5 per cent for this financial year, which runs to the end of March.
“One of the key aspects of the economic resilience is that the threat of inflation seems to be under control with the headline inflation number remaining consistently below the targets of the Reserve Bank of India,” according to a research note by Acuite. “While the July to September quarter number disappointed a bit, the consumption-led story shows a promise of sustainability.”
The International Monetary Fund expects India to retain its position as the world's fastest growing economy with a forecast of 7.3 per cent growth for this financial year, followed by growth of 7.4 per cent in the next fiscal starting in April.
Some are less optimistic.
“We remain wary of the near-term growth story,” says Sajal Gupta, the head of forex and rates at Edelweiss Securities in Mumbai. “Factors like the non-banking financial sector led tighter financial conditions and sluggish private capital expenditure ahead of various domestic and external uncertainties will weigh on the growth outlook ahead.
But the “oil plunge and election related revenue spending may be counters to growth drags”, he adds.
Mr Gupta expects India “to see moderation in growth” in the coming months, to average at 7.1 per cent during this financial year.
The Indian rupee has had a dramatic year, down by about 10 per cent to current levels of about 70 against the US dollar, due to the strength of the greenback combined with concerns about India's widening deficit and broader emerging market jitters. The currency hit an all-time low, breaching 74 against the dollar in October.
Analysts expect the rupee to experience further volatility in 2019. It “will likely see major swings during the year”, says Mr Gupta.
He says a likely softening of the US dollar in the early part of the year could help the rupee strengthen. But there are significant downside risks for the currency.
“The US-China trade spat will continue to linger on the Asian foreign exchange outlook, while Brexit developments and outcome by March 2019 could add another layer of uncertainty or certainty in the global foreign exchange space and risk sentiments,” says Mr Gupta
The rupee will also feel the effect of the looming elections.
“Rupee volatility could emerge ... if opinion polls start hinting at a mixed mandate, and with investors wary on taking heavy Indian rupee assets positioning ahead of the elections,” says Mr Gupta.
Inflation is expected to remain in check for now, but the rupee and oil prices remain risks, which will help determine whether the central bank will cut interest rates in February, as some economists are expecting.
The new RBI governor, Shaktikanta Das, will have to keep a close eye on inflation. He is under close scrutiny, after he took over from Urjit Patel, who abruptly resigned this month following a public dispute between the central bank and the government, related to the autonomy of the RBI.
Many businesses in India, particularly small businesses and those that are heavily dependent on cash, continued to feel the negative effects of Prime Minister Narendra Modi's controversial demonetisation move in November 2016, when the two highest value banknotes were scrapped, and the introduction of a new goods and services tax last year. GST replaced a convoluted system of taxes but has required a lot of adjustment by companies to the new, tech-driven system, which requires tax returns to be filed more frequently. The combined effect of GST and demonetisation drove some small enterprises out of business and also resulted in job losses.
“Mostly because of the newer demonetisation and GST regime, people took time to settle with it and some of us are still settling,” says Ketan Chokshi, the owner of Narayan Jewellers, a jewellery brand based in Gujarat. “As far as 2019 is concerned, we are hoping for a great and positive year.”
This month, India cut the GST rates on more than 20 items, including televisions and cinema tickets. There are hopes that there may be more changes to GST in 2019.
India's Finance Minister, Arun Jaitley, on Monday suggested that there could be plans to have most items coming under a single tax rate. GST currently has four different tax slabs, ranging between 5 per cent and 28 per cent.
There are companies in India that are satisfied with the country moving towards becoming a more digital-driven economy.
This year “has largely been a good year for businesses in India”, says Diwakar Nigam, the chairman and managing director of Newgen Software Technologies, headquartered in New Delhi. “The rapid economic transformation taking place within the country has changed the global perception of India. A large number of global IT companies are setting up their innovation centres here to tap the intellectual capital. We hope that the economy continues with its present growth trajectory, focusing on driving digital transformation of businesses across industries.”
For Mr Hiranandani, steps taken by the government, including investment into improving and expanding the country's infrastructure and the push to boost the manufacturing sector, are adding to his confidence in the economic outlook for the new year.
“All these initiatives shall not only uplift the trade sector but will also augur well to accelerate the economic growth of Indian GDP,” he says.
Updated: December 29, 2018 02:18 PM