2019 could be a story of two contrasting endings. Weighed down by competitive electoral promises, the Indian economy could spiral down along with the rest of the world. Or, it could rise higher, feeding off the energy of a stable new government, structural reforms already underway, and tailwinds of low crude prices.Bill Clinton's campaign strategist James Carville had famously coined the line. 'The economy, stupid', during the 1992 US presidential elections that limited President George HW Bush to one term. It's more popular variant - 'It's the economy, stupid', is going to be with us here in India in 2019 as Prime Minister Narendra Modi seeks a second term. The answer to the question - How did the economy do under the Modi government? - in a way, will decide if 2019 will be a defining year for the economy, or if it will go down in history as the year when populism killed promise.GDP growth, the mother number to gauge the well-being of an economy, averaged 7.35% in the first four years of the Modi government, well ahead of the 6.7% in the preceding five years of the Manmohan Singh led UPA-2 government. Of course, these are reworked GDP numbers that lowered UPA era growth, and the debate will go on endlessly about the veracity of this 'back-series' calculation. But like them or not, these numbers will stay.That being the case, GoI seems to have made a case for its re-election. But then, why does it seem there's such a high level of dissatisfaction? Why do, as some people have asked, we not feel this high growth?The most dissatisfied is the farmer and his even poorer cousin, the landless laborer. Their lot has not improved for years, despite loan waivers and much promise. Because the root cause of low income has remained unaddressed.On the new jobs front, there are no reliable numbers. Nearly 80% falls under the informal economy and survey-based numbers are available only once every five years. Though it can be safely said that GST and demonetisation impacted this sector adversely. Construction, which absorbed hordes of migrant labour from the hinterland, has been hit by the crackdown on black money and GST.The formal economy, going by provident fund (PF) data, seems to have notched up good job numbers. But that could also be partly due to the formalisation of the economy due to GST and the currency swap.So what about white collar workers and salary earners, who decide their well-being on the increments they get every year? In years of double-digit inflation, when the economy grew by double-digit nominal growth rates, increments were also handsome. As inflation has kept low, so have increments - although real increments, after adjusting for inflation, may still be high or on par with earlier levels. This may have caused some heartburn.Are these stakeholders any more dissatisfied than they were earlier? Or could it be simply that the discontent of a few has been magnified because of a social media that was not so pervasive in the last general elections in 2014? How would social schemes like flush toilets, gas connections and electricity temper such dissatisfaction?The crucial question and one that will have a bearing on how 2019 pans out for the economy is how the incumbent government perceives the situation. Does it have confidence in the numbers it has notched up, despite GST and demonetisation, and because of the better-than-usual delivery in areas of reforms, infrastructure and social schemes? Or is it getting distracted by the chatter of dissatisfaction, much of which is not verifiable, one way or the other.If the government reacts with a panic 'populist' response, countered by a bigger counter-promise, India could plumb to economic troubles from which climbing out could be a tough task. 67316829 This government already faces much pressure to announce a nation-wide farm loan waiver. The very expensive idea of universal basic income (UBI), a dole that the government’s Budget cannot afford, seems already under consideration.The impact on government finances could be much worse than the decadal shock of pay commissions when deficits rise, forcing a cut in productive spending. Even public investment could stall, markets tank, deficits rise, and interest rates climb up. The rest we have all seen before. The situation could be even worse, if a messy coalition takes charge in New Delhi in May 2019.The counter narrative of an economic lift off has an equally good chance of playing out - if a stable government, of any hue and colour, emerges after what is likely to be a brutally contested election. For this option to unfold, India will need a government not weighed down by populist electoral commitments.A number of structural reforms already in place – GST, insolvency and bankruptcy code, and ease of doing business are in the process of stabilising in 2019, and transitioning to the next step when their gains begin to flow.The bad loans problem of public sector banks (PSBs) has clearly peaked, and should soon allow for normal credit operations to begin, which in turn will allow funds-deprived sectors to grow again.The looming global slowdown, though a headwind for exports, would also ensure that crude prices, the Achilles' heel of the Indian economy, remain low, helping maintain the macro-economic balance of low inflation, and controlled twin deficits.The consumption story, the strong point of the Indian economy, can then play out freely. The bane of the economy for a while, private investments, which are already showing tentative signs of awakening, could start to contribute to growth. The bonus could be the next set of reforms - labour for one - by the new government that would fire ‘Make in India’ and exports.If this scenario plays out, 2019 could be the year India pulls further away from China in terms of growth, overtakes Britain to become the fifth largest economy, and climbs to an over 8% growth rate. That would, indeed, be a happy ending.
from Economic Times http://bit.ly/2CIxsWx
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