The year 2019 will probably be played on the macro front. There are a number of very important cues on the domestic and global macro front. Let us look at five such cues that will matter in 2019.
General elections 2019…
The tussle looks a lot more even after the ruling NDA lost the 3 states of MP, Rajasthan and Chhattisgarh to the UPA. This is likely to have a bearing, although the markets will be indifferent to an NDA or UPA government as long as the process of economic reforms does not really get impacted. The only macro worry would be if there is an unstable third front coalition with outside support from the larger parties. That is a situation the market really would not prefer. Politics is likely to largely drive the economic outlook for the year.
Trade war outcome
The one variable India will be watching is the outcome of the trade war. The trade war between the US and China has only been suspended for 3 months. IMF has already estimated that a full-fledged trade war would wipe 40 bps from global growth. That means; India will find it really difficult to get anywhere close to 8% growth if the global macros are not supportive. A lot of Indian sectors like IT, pharma and auto ancillaries are dependent on global demand and global spending. The bet will be on a brief trade war.
That will be the big challenge for the government. Post the December 11th loss to the UPA in 3 states, the NDA is likely to get aggressive on rural spend. The government has already announced a likely Rs.3 trillion package for farmer compensation and that will put a huge burden on the fisc. The fiscal deficit for the full year could shoot well above the 3.3% target putting pressure on the INR as well as the external rating of Indian sovereign debt.
Inflation and interest rates
The fiscal profligacy could lead to higher demand pull inflation. That would have a bearing on the interest rates and bond yields. RBI could cut rates in the coming year but that would be contingent on inflation staying in control. That will be a hard balancing act to do.
Crude oil and the rupee
This could be the all important variable for the Indian economy in 2019. Oil has drifted lower on global growth concerns but any demand spike during the year could result in an oil price rally. Anything above $60/bbl will spur retail inflation and also widen the trade deficit and the CAD, putting further pressure on the rupee. Reasonable crude prices will be the theme that the Indian economy will be hoping for, as that would be conducive to growth. ©