A year of choices with a ‘Bandersnatch’ finish

If you haven’t watched the much talked about interactive thriller “Bandersnatch” (from the Netflix TV series Black Mirror), watch it now. Viewers can choose across options and make decisions for the main character. The decisions they make, determine the ending they get. Yes, there are multiple possible endings in this TV episode.

India’s fortunes in 2019 could be somewhat similar. There are lots of choices that need to be made, each of which could have a profound impact. Let me explain.

There is a widely held concern that growth is slowing and needs policy intervention. Fallout from troubles in the country’s non-banking financial companies (NBFCs) is taking a toll and slowing global growth is not helping either. Rural incomes are weak, led by falling food prices. Urban incomes are weak, despite falling food prices.

All of this is correct. Growth is definitely slowing, but it is slowing to a more sustainable pace. In mid-2018, GDP growth had averaged 8%, and that was a period associated with a dangerously large trade deficit and rising core inflation. Growth has now fallen to the 7% range, which is more sustainable.

Furthermore, growth is slowing because of “yesterday’s” problems, which are likely to reverse on their own. The lagged impact of higher oil prices a few quarters ago is taking a toll now. But because oil prices have fallen sharply since then, the growth drag could also halt soon. The NBFC fallout was likely to slow credit growth. Encouragingly India’s mainstream banks are picking up some of that slack. Their lending is growing rapidly across sectors. There is an election cycle connect as well. Previously, we have found that growth slows in the quarter right before elections (as the government exhausts the fiscal space and the private sector postpones spending due to policy uncertainty), but rises sharply thereafter.

All of this suggests that the short-term drag is temporary. We expect growth to recover from mid-2019.

Instead, we believe long-term growth concerns are not sufficiently acknowledged. New investment projects that would herald higher growth for the medium term are falling at a rapid pace. Some of the reforms that are needed to raise investment, such as revamping public-private partnerships (PPPs) contracts and developing the corporate bond market for sustainable financing, have yet to be undertaken.

True, many other important reforms have been made, such as the Goods and Services Tax (GST) reform and the Insolvency and Bankruptcy Code. But some complementary reforms that could have limited the disruption from these are still work-in-progress. The point, perhaps, is that, to be successful, India needs to get into an ecosystem of a series of reforms, as opposed to one single reform.

On the fiscal front, the government is likely to meet its deficit target in the upcoming budget. However, that will only provide some uneasy calm. There is too much public sector paper (centre, state and public sector units combined) that is already exhausting the market. And several recently announced expenditures (such as farm loan waivers) suggest that medium-term fiscal targets will be difficult to meet. These could have implications for bond yields, sovereign ratings, and economic growth and stability.

There may be some hope of higher fiscal revenues arising from the GST and the Reserve Bank of India’s (RBI) ‘excess’ capital. On the GST front, unfortunately, the ask is too high (though not impossible). Tax revenues would have to rise faster than nominal GDP growth for the next six years to meet the fiscal targets.

Calculations of the RBI’s ‘excess’ capital (if any) are fraught with problems of definition. Even if some ‘excess’ is identified, it may not guarantee a steady stream of revenues each year. And a transfer of some stock of ‘excess’ capital could stoke inflation, calling for tighter monetary policy, which may ultimately hurt private enterprise.

There are some bright spots as well. Encouragingly, we believe half of the “spectacular” decline in inflation has been led by structural factors that are here to stay. Inflation is expected to run under 4% until mid-2019. And yet, excessive rate cuts now could reverse hard won gains. A low base in food and a revival in economic activity post-elections could push inflation up towards the end of 2019.

Finally, lower oil prices have the power to wipe out all of India’s external (balance of payments) deficit. Sadly, it masks the weak performance of India’s exports. If domestic growth is pumped up by short-term stimulus, it is likely to push imports up, thereby widening the trade deficit and destabilising the rupee once again.

All told, there is no need for short-term growth stimulus, and neither is there much fiscal or monetary space.

In the true “Bandersnatch” style, there are many choices to be made on the macro front — the choices the finance ministry makes on fiscal policy in the upcoming budget, the choice the government makes on short-term intervention versus long-term reforms, and the choice the monetary policy committee makes on policy rates.

These will determine whether India moves up sustainably on the growth curve. Or if it goes back into the all too familiar cyclical roller-coaster.

Pranjul Bhandari is chief India economist at HSBC

The views expressed are personal

First Published: Jan 27, 2019 08:23 IST

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