January , 2020
Economic overview before Budget 2020
19:44 pm

Dinesh Jain

2019 proved to be a challenging year for India where its economy dimmed. There were a number of challenges like declining of GDP growth rate, consumer confidence, and economic parameters, triggering fears of economic slowdown. Several sectors such as real estate, aviation, telecom, automobile, and construction suffered a constant decline in demand. On the other hand, banking and financial services were weighed down by ballooning bad loans, the NBFC crisis, and a general credit squeeze. While India’s economic growth came down to a multi-year low, the government and the central bank’s (RBI) resolution to
make India a 5 trillion economy raises strong hopes of better days ahead.

Global economies also stumbled, with Germany falling into near recession and growth in the UK slowing amidst Brexit uncertainty. Another important event that has shaken the global sentiments is the tariff war between US - China and US and other world economies.

The Government of India escalated efforts through various measures and stimulus packages to revive economic growth and markets at regular intervals. In a bid to provide a stimulus to a flagging economy, the Indian Finance Minister (FM) Nirmala Sitharaman announced a $20 billion tax cut, taking the rate for companies to one of the lowest in Asia along with the withdrawal of higher taxes for foreign portfolio investors (FPIs) and release of funds for bank recapitalisation upfront. Center approved a plan to set up a `25,000 crore alternative investment fund (AIF) to provide relief to developers with unfinished projects to ensure delivery of homes, as it seeks to provide relief to distressed homebuyers and provide a sense of relief in the ailing realty sector. It also unveiled a `105 lakh crore national infrastructure pipeline.

The Government hopes the new measures will boost consumer and investor sentiment and kick-start the economy that is showing signs of slowing down. Equity market witnessed a roller-coaster ride in 2019 guided by trade war concerns, tax proposals for India Inc and foreign portfolio investors (FPIs), slowdown in the economy, rate cuts by the Reserve Bank of India, recession fears and geopolitical concerns. During the year benchmark indices scaled fresh lifetime highs, registering their second-best yearly gains in five years.

Going forward, everyone is pinning its hopes on revival of economic growth and inflation to remain benign. The Union Budget, Government’s policies, RBI’s rate actions and the US elections are the key factors to watch out for in the New Year. Equity markets are likely to maintain a positive bias as structural reforms taken by the Government and the Reserve Bank would start to bear fruits, which will reflect on economic growth. However, long-term fundamentals of the Indian economy continue to remain strong. Indices projection, hopes and estimations for 2020 would be inconsistent but if we consider that the economy would revive then markets could scale further new highs in 2020.

The current geopolitical environment is defining a new age of uncertainty, which will weigh negatively on the financial markets in the coming year. Despite this outlook, we expect long-term investors to continue to benefit from the time-tested principles of portfolio construction. Although the confluence of slowing global growth and persistent geopolitical uncertainty creates a fragile backdrop for markets in 2020 and beyond, more favourable valuations have led to a modest upgrade in equity outlook over the next decade. The Union Budget 2020 would be an important event where the government would like to enhance focus on persisting rural distress, leaving more disposable income with individuals, spending more on infrastructure and improving the flow of liquidity to the disrupted banking sector. Rural growth is normally ahead of urban growth in many sectors but in the last six months, it was below urban. Government’s main concern would be on giving a push in rural demand and improve farmers’ earnings.

What gives hope in 2020 is that the government’s affordable housing scheme, reduction in corporate tax, GST tax revision, RBI’s 135 bps rate reduction, and the finance ministry’s push to empower bankers. This will certainly help to boost credit growth. Insolvency and Bankruptcy Code (IBC) has made debtor responsible and bankers are feeling strong like never before. Currently, as per National Company Law Tribunal (NCLT) data, more than 10,000 cases under IBC are pending before NCLT and if resolved would help to recover thousands of crores. It would be important to see in 2020, how the execution of the merged banks pan out as the move was aimed at revitalizing the sector amid financial crunch as well as increase exposure to global investors. Dealing with NPAs, raising funds and generate credit demand would be the challenge for both private and public sector banks in the coming year.

The rating actions by Indian credit rating agencies (CRAs) have recently come in for much flak on account of their failure, in a few significant cases where the giants defaulted. Thus, the Securities and Exchange Board of India (SEBI) issued a circular to increase the level of disclosures in standardised formats. SEBI is likely to continue to encourage CRAs to disclose the highest quality of information, given full freedom to devise their methodologies and past performances. This will allow investors to make appropriate decisions without compromising on the ability of CRAs to provide the best services.

RBI has cut rates by 135 bps in 2019 but the transmission of rate cuts to the end consumer is yet to happen fully. A rate cut generally augurs well for companies that are debt-laden as it reduces interest cost, banks as well as, non-banking financial companies (NBFCs) as it brings down the cost of funds. The transmission will greatly help in boosting overall demand and push up the consumption and investment environment in the economy.

After a careful review of the liquidity situation RBI had already conducted two rounds of monetary policy move, termed as a local version of ‘Operation Twist’ in financial circles. As per the current liquidity and market situation RBI has decided to conduct one more simultaneous purchase and sale of government securities under Open Market Operations (OMO). This will help to stimulate private sector borrowing, as well as dampen term premium to aid the centre’s borrowing program by making it cheaper. The central bank will conduct more rounds of Operation Twist in future which will be an important step to boost the liquidity scenario in the country.

Global economic growth continued to soften since early 2019, with trade and manufacturing showing signs of weakness, heightened policy uncertainty and trade tensions between major economies which has been accompanied by a deceleration in global investment and a decline in confidence. Rising public debt levels are reducing the effectiveness of fiscal policy in emerging market and developing economies. Thus, major central banks dovish stance has led to some easing in financing conditions. Structural reforms, such as improvements in institutional quality, can help boost growth and reduce poverty. A further escalation of trade tensions involving major economies could lead to a sharp increase in trade barriers but the phase one trade deal between US and China in 2020 after nearly two-year of trade confrontation would be the most optimistic one in this regard.

In the recent past, global financial markets have turned cautious after a US airstrike killed a top Iranian commander, fueling concern over an escalation in tensions. Since then, Brent crude oil prices are up on concerns on disruptions from Iranian retaliation. Thus, in coming days oil markets will continue to feel the impact with major supply disruption in an escalating conflict, particularly if Iran retaliates and targets oil infrastructure and logistics. The US-Iran tension has raised the demand for safe-haven currencies and assets. India may see its oil import bill rising, putting pressure on current account deficit and rupee amid escalating tensions between US and Iran.

Volatility in global markets is likely to increase due to US-Iran tension. Trade negotiation talks between US and China will be in focus but any adverse outcome could drag global market lower. Market participants would remain nervous until there is more clarity over how geopolitical tensions will proceed which could badly hurt global economic growth, especially if the price of oil increases. At the domestic level given the number of green shoots and the policy actions announced, we believe that the worst is behind us and that we will have a cyclical though gradual recovery. if we leave aside global concerns, domestic markets are likely to continue positive momentum on positive domestic news flows, lower interest rates, bad loan cycle bottoming out, NCLAT resolutions,  and government’s focus on reviving demand especially in rural India  which would increase investors’ confidence and expectation.

We strongly believe that the lower raw material prices and the recently announced corporate tax cuts will lead India Inc. to report better numbers.


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