Brief Macro: Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth and more

In this briefing:

1. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth
2. India: Budget 2019 – Hello Populism
3. Is The Fed Spiking The Punch Bowl In The Late Hours Of The Party?
4. FLASH: UK IP Relies on Energy to Grow in Jan-19
5. The Dollar Is Already Dead

1. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth

India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans. 

The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.    

The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities. 

2. India: Budget 2019 – Hello Populism

The NDA Government presented its 5^th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.

3. Is The Fed Spiking The Punch Bowl In The Late Hours Of The Party?

Employment growth is strengthening and manufacturing growth picked up early in 2019.  The Fed, however, has pivoted to a significantly more dovish stance.  The Powell Fed appears to have turned former Fed Chairman McChesney Martin’s operating regime (the Fed should order “the punch bowl removed just when the party was really warming up”) on its head.  Powell failed to provide a clear and convincing explanation for why Fed thinking on the rate outlook and the balance sheet has shifted so much since the December FOMC meeting.  Subsequently, the January employment and ISM manufacturing data indicate that neither the market swoon nor the government shutdown slowed U.S. growth.  We discuss the Fed’s surprisingly dovish pivot and some potential consequences.

4. FLASH: UK IP Relies on Energy to Grow in Jan-19

• The UK’s manufacturing PMI fell by 1.4-points to 52.8 in Jan-19, which was double the Consensus decline. Inventory accumulation continues to support the UK survey.
• Weakness across the European car manufacturing industry is weighing on output in the official data even more than the surveys. Industrial production only looks like it will rebound in Jan-19 because of energy output.

5. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.