As the rough and tumble of election is over, the focus turns on who will form the next government at the Centre. If exit polls are to be believed, Narendra Modi is set to roar back to power with a comfortable majority for the NDA.
The first term of the Narendra Modi dispensation enjoyed a benign inflation scenario both on the fuel and food fronts. The same may not be the case for the next government as both food and fuel inflation numbers are looking up. A fast changing geopolitical situation in West Asia threatens to send the fuel prices soaring high while the recently released wholesale price index numbers show that the food inflation is firming up after a long period of disinflation.
Another major worry before the next dispensation will be a slowdown in the economy led by plummeting consumer demand. From FMCG to passenger vehicles, tepid consumer demand has hit the economy hard.
“From almost 16% in the last three months of 2018, growth in the market for fast moving consumer goods has slowed to 13.6% in the first three months of this year, with sales of essential items in rural areas slowing the most,” a Bloomberg story, quoting a Nielsen survey, reported.
Official GDP data to be out on May 31 is likely to point at a slowdown as the fourth quarter GDP figure is estimated to have slipped further below the 6.6 per cent growth recorded in third quarter of the last fiscal.
The slowdown has been acknowledged by the finance ministry in its monthly economic report. “India’s economy slowed down slightly in the last fiscal due to declining growth in private consumption, slow increase in fixed investment and muted exports,” the report highlighted.
The weakness in consumption growth, which forms almost 60 per cent of the GDP, is likely to spill in the current fiscal as well. A part of it has to do with the liquidity crisis faced by the NBFC and the HFC sector as their retail portfolio has increased sizeably in the last few years. The reluctance on the part of banks to transmit the effects of rate cuts has also drawn the attention of the regulator and the next government may have to firefight the situation with bold steps to lift the consumer sentiment.
The weakness persists in the manufacturing space as the index of industrial production for the month of March contracted, falling to a 21-month low of (-)0.1 per cent.
The slowdown also threatens another major plank on which the Narendra Modi government rode to power in the 2014 elections – job creation. A slowing economy poses a challenge for the new government to create jobs. A CMIE survey and a now-junked NSSO report suggested that job creation is in doldrums. The government decided to counter that data by asking the Labour ministry to come up with a report on jobs created under the MUDRA scheme. As per some reports, that report will only be released after the election results.
On the tax front, the next government may have to look at ways to ramp up the revenue collection as both the BJP and the Congress have announced direct income support schemes. At a time when the economy is gripped with fears of a slowdown and a GST regime which is still evolving, the next government may have to find ways to increase its revenue collection to fund the schemes. A bold divestment agenda and auction of new spectrum could bolster the revenue side of the budget for the new government.
The ongoing resolution of stressed assets, which has at best crawled, hasn’t yielded any major victory for India’s beleaguered state-run banks. The new government will have to speed up the pace of resolution under the Insolvency and Bankruptcy Code. Also, a major task at hand for the next finance minister will be to continue the merger of state-run banks so that India only has few mega banks with bigger balance sheets.