Macro-economy in 2019 and outlook for 2020

The year 2019 is almost over and investors are looking at the new year 2020 with optimism. What will the new year tidings be, how will their investments fare in terms of returns and capital gains, will the government provide a further boost by cutting personal income tax rates – so on an so forth, there are some of the unanswered questions in their minds.

The steps taken or that will be taken by the government will matter most for it has the potential to spur investments, kick start the economy and boost demand for goods and services. There are expectations that something significant will be announced in the forthcoming budget of 2020, which is little over a month away. As always the main things to look out for will be its expenditure on social welfare schemes and spending on infrastructure such as roads, railways, housing etc. The budgetary allocation or the increases announced thereof will matter more. Next will be incentives to certain industries like those focused on exports will count. As already mentioned a further rationalisation of personal tax rates will buoy the common man and may just incite him to spend more on consumption.

Other than these, the government has already announced corporate rate tax cuts to incentivise the industry for more investment and capital formation. Whether this will borne fruit or not, remains to be seen. One issue that merits a mention is the approach toward the GST that will be taken. Here it ought to be mentioned that a further downward revision will be welcome, at best they should be left untouched for now till the recovery has gathered strength. For an upward revision in GST rates or bringing items of everyday consumption in tax bracket has the potential to prolong the economic recovery.

Most estimates put GDP growth rates in the range of 4.5-5% for 2020. Industry will take time to revive as always, demand picks up after a time lag and the same gets reflected on the output side much later. The liquidity squeeze in the NBFC and banking sector has to ease. The RBI has already affected rate cuts to the tune of 135 bps in recent time, the same has to percolate downwards and full benefits have to be transmitted to the borrowers. The MSME sector too needs more attention.

During times of depression or economic slowdown, the government’s role becomes more important and thereby the expenditure that it incurs, even at the cost of fears of rising inflation or fiscal deficit assumes more significance. Economy gets a boost when consumption increases and this can be done by putting more money in the hands of people, the common man. When demand for goods and services increases, businesses see an opportunity and make capital investment in expanded or new facilities. This leads to employment generation and more demand.

This, no doubt takes time but the recovery is likely to be more visible and not just flash in the pan. Overall, a three pronged support will be required – monetary, fiscal and macro policies in 2020.

As for 2019, the year is likely to end on a not so optimistic note. Because though we may not be doing as bad as some economies perform during a macro-economic slowdown, it is a known fact that hitherto one of the fastest growing economies in the world, in terms of GDP, India is now in the midst of an economic slowdown, as borne out by various internal and external data. Estimates predict the Indian economy to have grown in the mid-range of 5-6% in 2019, down from around 7.5% GDP growth achieved in earlier years. Major industries are facing a demand glut. The index of industrial production (IIP), a key indicator has shown that eight core sector industries contracted by 5.8 % for the month of October. These industries like coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity generation comprise 40.27 % of the weight of items included in the IIP. Automobiles sales too are down with some exception in two wheelers and the tyre segment; aviation and telecom are suffering, so is real estate and domestic banking. Domestic exports growth is showing sign of waning and there is deterioration in currency movement (against the dollar). Rising consumer prices mainly vegetables and telecom tariffs and the rising inflation could worsen the situation.

The year 2019 was also affected by prolonged monsoon and floods in many parts of the country. This prolonged the sowing season, destroyed ready crops in many states, also affected tourism potential and; curtailed rural spending. The macro-economic outlook is more subdued and uncertain currently than in previous years.

The happenings in 2019 will effectively set the tone in 2020. All eyes will immediately be on the budget in February. The government has to lead the charge to revive the economy. Though measures like corporate rate tax cuts and deferment of liabilities of bleeding sectors like telecom or re-capitalisation of the domestic PSU banks and their mergers thereof are welcome sign, more concrete work needs to be done.

Investors looking to earn returns on their investments can look forward to invest in well-diversified blue-chips and certain sectors like pharma and IT, from a medium-term perspective. Investment in diversified equity MF scheme by taking an SIP is also a preferred route for those not so conversant with the stock market nitty-gritties.

All said and done, broad recovery in 2020 may just not be round the corner, so ideally keep patience, wait for the tide to turn and keep investing in a calculated and risk mitigating manner.

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