Uncertainty around India's economic policy at 27-month high in May

Economic policy uncertainty was at its highest in over two years in the month of May. Election results were declared on May 23, granting a majority to the ruling Bharatiya Janata Party (BJP) for a second term.

Index levels more than doubled over March. It rose from around 40.6 to 83.6 in May, shows monthly data from Bloomberg. The index is a measure of economic policy uncertainty based on news coverage of policy issues.

A similar phenomenon was seen around the time of the 2014 elections. However, the rise ahead of the results weren’t as sharp. The index rose from 66.1 in March 2014 to 88.9 in May 2014. Index levels had been more sanguine in recent times in India. The March 2019 level of 40.6 was one of only a handful of times that it had dipped to such levels in the preceding ten years.

Global policy uncertainty, meanwhile, has been on the rise. Increasing trade tensions between China and the US along with other economic issues have seen a sharp rise in China’s uncertainty numbers. This has coincided with a rise in global uncertainty. Compared to both, India looks relatively sanguine despite the spike around elections.

Additionally, the election result is expected to have a positive impact on sentiment around policy in India, even as the economy has been facing headwinds.

Abhimanyu Sofat, head of research, IIFL Securities suggested that the election mandate has helped provide confidence on the policy front. However, challenging unemployment and consumption data would seem to point to growth issues.

“The majority government is positive. At the same time there is a lot of bad economic data which is coming out,” he said.

Unemployment has come in at what has been seen to be a 45-year high. At the same time, a demand slowdown is seen in consumer segments such as automobiles, where sales have fallen to multi-year lows.

Satish Menon, Executive Director at Geojit Financial Services, feels that a pick-up in capacity utilisation would be key to fuelling the investment cycle. Around a quarter of capacity remains unutilised in manufacturing companies, according to data from Reserve Bank of India. Companies are reluctant to invest in creating fresh production capacity when existing capacity hasn’t been fully used because of slack demand. This affects growth. The government is now likely to move quickly to address these and other economic issues, according to him.

“I think you’ll see a slew of measures in the next hundred days,” he said.  He expects action to be taken on creating more employment, and possible measures to address problems in the Non-Banking Financial Company (NBFC) space, which has been struggling with liquidity issues.

The effect of measures will likely take three to four quarters to reflect in corporate profitability, Menon said.