INTERNATIONAL ADVISER: Protests Are ‘Mixed Blessing’ For India Economy

Fiscal boost more likely in February’s Union Budget according to consultancy Capital Economics  
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The direct economic impact of the protests that began in opposition to the citizenship amendment bill is likely to be small, says Shilan Shah, senior India economist at Capital Economics in an update on 6 January.

 

However, the protests have increased the chances of a larger fiscal stimulus in next month’s annual Union Budget statement by the government, which would be positive for growth in the near term.

On the downside, the controversy surrounding the citizenship bill – as well as the pursuit of such populist policies in the first place – appears to be causing attention on economic policymaking to slip.

The rallies against the citizenship amendment bill – which aims to fast-track citizenship for non-Muslims from neighbouring Muslim-majority countries – appear to have evolved and morphed over the past week or so into broader anti-government protests. This has invariably raised questions about economic and market impact.

On the (arbitrary) assumption that the protests fizzle out soon, we think the direct impact from lost working days and travel disruption will be limited.

While the latest protests have garnered more attention in the international media than is normally the case, it is important to bear in mind that protests in India are very common and typically don’t have a palpable economic impact. Even large protests like those going on how are relatively common.

And while protests have been sporadically breaking out across the country, the large bulk has taken place in and around Delhi (the latest being a student protest at the Jawaharlal Nehru University campus at the weekend). The capital region accounts for less than 4% of India’s economic output.

Foreign portfolio inflows rose in Q4

The market impact has also been small so far. Data from the Securities and Exchange Board of India (SEBI) show that foreign portfolio inflows rose throughout Q4. Domestic investors don’t seem particularly perturbed either. Local equity markets remain close to all-time highs.

However, we also need to consider the response that the protests might elicit from policymakers. The protests have surely raised the probability of a larger fiscal stimulus in next month’s union budget for FY20/21 than may otherwise have been the case.

That could provide a much-needed boost to the economy, though it would likely be accompanied with upward pressure on local bond yields.

More concerning, fiscal loosening apart, the controversy surrounding the citizenship bill that triggered the protests – as well as the government’s implementation of such populist policies in the first place – appears to be causing attention to economic policymaking to slip.

Much of the winter session of parliament was spent discussing the citizenship amendment bill and its subsequent impact.

This came at the expense of, among other things, progress on the passage of a key labour reform bill.

If this continues, in time investors will notice. Any fall in confidence would compound the impact on growth prospects over the long term.

 

Source: INTERNATIONAL ADVISER



Categories: Economy, India news, News

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