The State of Indian Economy in 2019
India, world’s third largest democracy, has been through a roller coaster ride since last one year. IL&FS default escalated into a credit crunch followed by economic slowdown. Some of the most critical events that took place in the last one year have been the IL&FS default, US-China trade war, oil price hike, rupee falling to an all time low, acute slowdown in automotive sector, slowdown in real estate sector, stock markets crashing twice, other NBFCs defaulting, banks going bankrupt, abrogation of Article 370, floods and drought and Moody’s downgrade India’s rating.
Most of the above events are a result of international or macroeconomic factors though some were an outcome of unplanned implementation of reforms that could’ve made a positive impact. The government and the RBI have together so far successfully managed to reverse the sentiments in the stock markets. However, one should not forget the bigger picture. There is still a lot to work on. The following one year or two will be challenging since the repercussions of those events will be prolonged and the country will slowly and gradually move ahead to the path of stability.
Summarising the chain of events in a simplified manner I understand that due to demonetisation, real estate sector got largely affected since most of its transactions include huge amounts of cash. The real estate slowdown followed by the delays in other infrastructure projects led to the NBFCs’ Asset-Liability Mismatch leading to IL&FS defaulting on its repayments. This spread a round of fear in the market leading to Banks and Mutual Funds reducing their loan disbursements to NBFCs and long-term risky projects leading to lack of investment. RBI and government were dealing with the crisis that had led to a credit crunch in the market. On the other hand, due to the oil price hike, rupee value reached all time low of around 74 against a dollar. US-China trade war was also escalating while Brexit just kept getting delayed. Venezuela was in its recession and US-Iran ties were deteriorating further spreading even more fear. Unfavourable and unstable international and domestic situation led to stock markets going bearish. While the credit crunch was affecting the automotible sector the most, real estate and infrastructure were struggling to raise investments. The new re-elected Modi government had a lot of responsibility on its shoulder to revive and uplift the economy. One of the biggest moves taken by the government was the abrogation of Article 370. The abrogation was followed by series of curfews, internet issues, detainment of prominent personalities and journalists and criticism from the world especially Pakistan. However, the government was and is still firm on its stand and say that the move is taken only to develop Kashmir and give the citizens there same rights as other citizens of India. The government also undertook numerous reforms to revive the economic slowdown from exports to real estate. On the other hand, government deepened ties with Saudi Arabia urging investors to invest in India and also deepened ties with Germany. Moody’s recently downgraded the rating for India. However, it is being criticised for unjustified reasons. The government also responded to it saying the fundamentals are strong and due to high growth potential, international investors may still be keen on investing in India. Moody’s rating still comes at a cost since it affects India’s ability to raise funds through its sovereign bond. Today’s verdict on the long fought Ram Janmabhoomi – Babri Masjid case also came to an end peacefully without any extreme reactions.
The main concern here is, one, the struggle in the banking sector – banks struggling with high NPAs and NBFCs defaulting on repayments, and two, a potential global recession. Though analysts are now optimistic after the Fed rate cut that US has managed to dodge a recession, the repercussions of the slowdown are going to be felt sooner or later and hence, bracing for impact is always beneficial. However, the Indian stock market is highly optimistic with easing of US-China trade relations and has seen a sharp bull run over the past two weeks. The banking sector crisis is also going to take a while to stabilise and hence, the other sectors will also be indirectly affected. Also, the way markets have risen, a correction can be expected soon. Apart from that, the job crisis in India is still significant.
The above stated issues and events are only those that have a direct economic or financial impact. Other political and social issues like rapes, murders, climate change, free speech, etc. still remain undiscussed. All of this indicates that India may witness a bumpy road ahead.