Year 2019 is certainly going to be a special year for Indian economy, for it is heading to witness elections to constitute the 17th Lok Sabha and formation of a new government that will ultimately define the course of the economy for the coming five years. Yet, there is nothing much to cheer about its arrival, except that it has drawn the curtain down on the most turbulent 2018.

Year 2018 was a turbulent year in many ways for the banking and financial markets. It all started with the RBI issuing its circular of 12th February, 2018 — ‘Resolution of Stressed Assets : Revised Framework’ — which “made the IB (Insolvency and Bankruptcy) Code as the Sudarshan Chakra to wipe out the evils of NPA.” As a sequel to this, 11 Public Sector Banks came under RBI’s Prompt Corrective Action (PCA) norms that made them unable to lend further. And this has not only radically changed for ever the way banking is done, but has also sown the seeds of discontent in the government. This was further fanned by the Rs 130 bn fraud perpetrated on banks by two celebrity diamond merchants, for which the government blamed the RBI. Soon, this skirmish between the Finance Ministry and the RBI became public. Then came to light the failure of corporate governance at IL&FS and its implosion, which in turn made banks more cautious in lending to Non-Banking Financial Companies resulting in liquidity crisis. This in turn had adversely impacted the functioning of Micro, Small and Medium Enterprises (MSMEs).

Of course, as 2018 was coming to an end certain encouraging news started pouring in. RBI’s latest financial stability report reveals for the first time half-yearly decline in the ratio of gross NPAs to advances since September 2015 — the ratio dropped from 11.5% as of March 2018 to 10.8% by end September. Further, looking at the results of the stress test for credit risk at banks which revealed that the GNPA ratio would narrow to 10.3% by March 2019, the governor of RBI prognosticated that the banking sector “appears to be on course to recovery”. Over it, to make the banks placed under PCA attain a better status and get ready to lend, the government has announced a large recap plan, though such recapitalization sans reform may turn out to be a futile exercise. Nevertheless, there emerges a ray of hope that credit disbursal by banks would soon pick up momentum.

Next, as the reports indicate, the RBI board under the new governor has set a basic rule that the central bank will not touch the ‘unrealized gains’ in its balance sheet for dividend distribution to the Government of India. Simultaneously, a committee has also been appointed to determine the adequate level of reserves for the central bank with a clear directive to submit its report within three months. As desired by the government, the RBI has also permitted a one-time restructuring of existing loans to MSMEs that are in default but ‘standard’ as on January 1, 2019, subject to the aggregate exposure of a borrower not exceeding Rs 25 cr as on January 1, 2019. This U-turn in RBI’s philosophy of handling NPAs, though a retrograde measure, may for the time being offer a breather to the MSMEs that were adversely impacted earlier by demonetization. The RBI board also appears to be concerned about deliberating on its governance system in depth before taking a decision. All this makes one believe that wiser counsel has prevailed over the interested parties paving the way for a better working relationship between the government and the central bank.

Coming to the external sector, with the rise in oil prices, rupee was earlier badly hit. With the falling rupee, coupled with the Fed raising the interest rates, FIIs withdrew funds from capital markets. However, with the crude prices coming down, rupee becoming stable, inflationary pressure easing and current account deficit being contained at 2.5%, macroeconomic fundamentals are likely to remain comfortable in the foreseeable future. Similarly, the structural reforms that are already in place, such as GST, IB Code, ease of doing business, etc., might progress well to stabilize in 2019. Further, backed by stable domestic consumption and capital expenditure picking up momentum, the real GDP is likely to grow at 7.4% as estimated by IMF in 2019.

But much of this depends on the forthcoming parliamentary elections: if the electoral promises such as farm loan waivers and the growing clamour for higher income for farmers made by the contesting parties result in expansionary fiscal policies, then the Indian economy might as well spiral down along with the global economy that is already hard hit by the US-China trade war. That said, we must also factor the latest reports from China about widening cracks in its economy forewarning weakening growth amid a background of trade tensions. Analysts are also wondering if the US is heading for a recession. These warning signs will certainly impact India’s economy.

Nevertheless, if a stable government is elected and if it can muster courage to pursue non-populist policies, the already existing reforms, coupled with the favourable crude prices, might nudge the economy to spiral up. Either way, 2019 is going to be an eventful year.