If uncertain direction of the domestic and global economy is
an overhang, FY 2020 looks equipped to sail through the storm
The new fiscal year has begun with a bang. Resumption of
foreign fund inflows propelled the benchmarks to notch historic highs. The
economy is showing signs of mending and preparing for a takeoff. Goods and
services tax collections in March were the highest ever since the introduction
of the regime. Fiscal deficit for the year is under control. Deft inter-PSU
buying enabled meeting of the divestment target. Encouraged by the enthusiastic
response to the first auction, the Reserve Bank of India will for the second
time undertake to exchange rupees worth US$ 5 billion for dollars. The exercise
has achieved the twin objectives of making available funds for banks to lend in
the local market and stem the slide of the Indian currency. A stronger rupee
and a chest brimming with forex reserves are powerful weapons to cushion any
transmission of higher oil prices. The US-China trade war has triggered scaling
down of the growth trajectory of the global economy. The downside of sluggish
export demand will be outweighed by the benefits to domestic manufacturing. The
US Federal Reserve for the second time has kept its policy rates on hold. The
looming trade disruption was one of the factors contributing to the decision.
India’s central bank got the much-needed breathing space. Good liquidity and
soft interest rates should boost consumption sectors. Domestic manufacturers
will benefit from the weakening of commodity prices on US-induced slowdown in
China. Rising input costs was a major overhang on producers’ margins in the
December 2018 quarter.
On the other side is conflicting forecasts of monsoon after
an uneven one last year. An output glut has kept food prices soft so far.
Supply deficiency can torpedo the benign inflation. The next policy meet of the
central bank will be at beginning of the southwest agriculture season. In all
probability, the RBI will prefer to take a pause in its rate cut cycle till
clarity emerges in August, on the eve of the festive season. The first half of
the current fiscal year is likely to be a washout because of the uncertainty. A
full-fledged budget is scheduled in July. With election behind, there will no
longer pressure on the government to soften the edges. The report on direct
taxes is awaited. It is likely to suggest lower rates and elimination of
breaks. The GST levy on most items is already at a level that cannot be pulled
down any further to spur consumption. The resolution of the global disagreement
on tariffs will complicate rather than ease the problem. Crude oil, tamed by the
slide in buying from the euro region and China despite cut in production by the
exporters’ cartel, is straining to break free on the prospect of a thaw in
trade negotiations. Overseas investors will turn their back if the economy back
home bounces on the normalization of ties with China.
The year indeed looks intimidating if resurgent oil prices
and possibility of deficient rainfall are viewed as headwinds instead of
opportunities. Recovery in the Gulf economies will boost remittances and orders
for project exporters. The unraveling of the tech story after the switch to
digital and clampdown on US visas has left real estate developers reeling. The incoming petro dollars will boost their
recovery. Commodity producers, exasperated with the tepid usage, will get an opening
to nurture their margins. Having faced oil shocks before, the Central
government and the RBI are in a better position to handle any blowout. Careful
calibration of the share of the subsidy burden with oil marketing companies on
one hand and the cost of money on the other can cushion the inflationary impact
on retail consumers. Not all the benefit of low crude prices was fully passed
on to the refilling stations, though some states did marginally lower taxes. Real
interest rates remain high despite low CPI and WPI numbers. Thus, there is
plenty of room for the policy makers to sit back and watch the unfolding
picture. After two consecutive periods of excess, the levelling of need for and
availability of farm produce means the minimum support prices lose the sting to
puncture the government’s balance sheet. Instead of a slump, sales of autos,
consumer goods and housing-related products will ride on the renewed purchasing
power in the rural market, supported by better return on cost of production, nil
interest rate short-term loans and insurance cover. The competition in the
fast-moving consumer goods segment will recede in favor of strong players with
sustaining power. The success in mopping resources from the domestic and
overseas debt and local equity markets by corporate India recently points to
cash that is impatient to be deployed despite the uncertainty inherent in the
run-up to electing a new government. No wonder, stocks did not react
significantly on projection of scanty rains.
-Mohan Sule
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