The feat of winning consecutive majorities by a single party has not been achieved in India since the seminal elections of 1984. The government would also not be mistaken in interpreting the results as a strong referendum on the macro stability India has been able to achieve in the last five years. Indeed, low inflation, manageable twin deficits and reasonable growth have played a role in the government’s re-election. The fixed income and equity markets have reacted positively, signaling their approval for policy continuity.
While there may be potential changes in the Cabinet, we do not believe the economic team and management will change materially in its second avatar.
The near term headwinds, however, are daunting.
Q1 GDP figures next week will confirm that growth in India is in the midst of a cyclical slowdown. The government faces a three-pronged slowdown. There has been a simultaneous stalling in consumption, persisting credit issues in the banking and NBFC sectors, and an uncertain global backdrop. This trifecta of problems will pose a strong near term challenge, which the government will need to navigate adroitly through both communication and actions.
We think the Ministry of Finance will quickly need to consider reasserting commitment to maintain stability in India’s financial system, especially banks and the NBFCs, while working to strengthen regulation.
In recent quarters, the Reserve Bank of India (RBI) has been pro-active, and a high degree of coordination — deploying fiscal and monetary support to prop up near-term growth prospects — would be ideal.
Over the medium term, the government should move decisively to nip financial sector issues in the bud, ensuring that growth improvement incentives are clear and flowing. Simplification of GST, a focus on resolution and providing more opportunities for foreign participation in our capital markets will be greatly beneficial for the economy.
Further, the trade war escalation between the United States and China provides a unique opportunity for India to increase its manufacturing footprint, and a targeted effort to attract exportfocused manufacturing and building surplus capacity can provide for both foreign direct investment (FDI) and increased investment in the economy.
Further, the Chief Economic Advisor has recently spoken about land and labour reforms, which if implemented will further improve India’s potential growth. The government has been able to deliver 4% inflation, and 7.5% growth in its last five years, while consolidating its fiscal deficit and building external resilience. If the government pursues the promised reforms in agriculture, manufacturing, and the financial sector, India can expect its factor productivity growth of labour and capital to be further unlocked, and the country can be set on a path of sustained growth above 8% for the next five years.