Harsh winds ahead for India’s political economy
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Harsh winds ahead for India’s political economy

We had four years of relative macro-economic stability but could not use that to rev up growth and create more jobs. Our exports engine remains broken. Now, as the economic tide turns, coinciding with a tricky electoral season, the country finds itself in a vulnerable state.

analysis Updated: Oct 27, 2018 17:43 IST
The Indian economy, which till recently was the subject of much bragging and chest thumping, is beset with headwinds(PTI)

Harsh winds are gathering on the horizon; the forecast for India is grim for the next 12 months. A threatening mix of economics and politics is heralding the onset of a difficult phase across the board. Citizens beware.

The Indian economy, which, till recently, was the subject of much bragging and chest thumping, is beset with headwinds. Our trumpeted macro stability has been replaced by a distinct precariousness, with many fault lines opening up at the first sign of trouble. It’s only when the tide goes out that you know who has been swimming naked, as the old adage goes. It appears many, in our case. Leading from the front are Non-Banking Finance Companies or NBFCs, who feasted on the misfortunes and inadequacies of public sector banks over the last few years to increase their influence by leaps and bounds. Now it appears they may have bitten off more than they could chew. The result — an inevitable slamming of brakes that could precipitate a liquidity crisis and a shrinking of credit growth at a time when we can ill afford it. NBFCs, while not as important as banks, are now a significant part of the Indian financial landscape and can, on the margin, trigger an economic slowdown. With their current problems, it is only a matter of time before they drag down the real estate sector and eventually even affect consumption trends. In itself, the effect wouldn’t have been calamitous but coming as it does, along with other growing problems such as galloping crude prices, stubbornly low GST collections and the fear of fiscal overshoots, a sliding rupee, rural distress and rising interest rates, we should brace ourselves for turbulence.

The political landscape looks equally intriguing. By now, it is quite clear that the government’s promise of a major economic boost, lies in tatters. There are growing doubts on whether the prime minister’s personal popularity will be enough to carry the BJP over the finishing line next year. This is bound to be causing great nervousness in the corridors of power, raising the risk of serious mistakes before the elections and making the road for the next twelve months even more treacherous. The government could throw caution to the winds and go ultra-populist in a desperate bid to win votes, which has grave consequences for our macro stability. If not, it would resort to non economic means to shore up public support in its north Indian bastions of Uttar Pradesh, Bihar and Madhya Pradesh. The Ram Mandir has to top any such agenda, raising fears of social instability and unrest. In any case, the prospect of a fractured verdict with no clear winner is very much in the realm of possibility. The choice may ultimately be between a vastly weakened NDA or a coalition of several non-BJP parties, both likely to be frowned upon by players across the economic spectrum. This may roil markets even more and make business leaders shyer of fresh investment commitments. If, by then, the world outside also looks shaky and crude prices are still higher, we could easily go into a tailspin. None of these are low probability outcomes and therefore should not be dismissed.

We had four years of relative macro-economic stability but could not use that to rev up growth and create more jobs. Our exports engine remains broken. Now, as the economic tide turns, coinciding with a tricky electoral season, the country finds itself in a vulnerable state. We are no longer in control of the situation and have to simply hope that emerging economies are not hit too badly by shrinking global liquidity and trade wars, and that we don’t have a tricky political verdict to boot. It is a very uncomfortable position to be in. As we enter this rough phase, the primary thought in every mind should be to still be standing at the end of it. It is imperative to take no unnecessary risks, embrace conservatism and play for survival. Hope for the best but prepare for the worst, as they say in financial markets.

Udayan Mukherjee is Consulting Editor, CNBC TV18. His novel Dark Circles is out in bookshops this week.

The views expressed are personal

First Published: Oct 27, 2018 17:42 IST