Impact of 2019-nCov on Asian growth could be shallow and short-lived ; India: A litany of tax cuts in an otherwise bland budget devoid of ideas

Highlights from the CAA Weekly Table

What has changed?

• Global economy: A sharp downturn in China this quarter is certain: external demand for Asian exports will depend heavily on the still-robust US economy. But the US economy is slowing and the composition of its growth does not favour a strong boost to Asian exports. This should prompt the region’s policymakers to step up policy support.
• Asian economies: The Jokowi administration has been rocked by successive scandals at a delicate time when potentially game-changing reforms are being readied for parliamentary approval. The Singapore economy could lose momentum in 1Q20 as the key finance & insurance sector pulls back. The Thai economy saw broad but unconvincing improvement in December: growth drivers are limited and the prospect of timely fiscal support has shrunk. The tax-to-GDP ratio continues to inch up in the Philippines, on the back of several tax hikes and robust economic momentum, bucking the regional trend.

Impact of 2019-nCov on Asian growth could be shallow and short-lived

• Despite the growing alarm, the impact to Asian growth of the 2019-nCov outbreak should be rather modest: the fatality rate is stabilising at a lower level than initially feared while security measures taken by governments should limit the damage to China.
• Also significant are automatic stabilisers that will kick in to provide a reprieve, for instance the expected weakening of Asian currencies which move in lockstep with the Yuan.
• There are, however, several risks to watch for: 1) the virus could mutate further; 2) lower growth could set off existing financial vulnerabilities in the Chinese financial system, 3) a weakened China may not be able to fulfil its promises to buy US goods, with ramifications for trade tensions; 4) the outbreak could speed up production relocation out of China.

India: A litany of tax cuts in an otherwise bland budget devoid of ideas

• As Budget 2020-21’s fiscal stance is just marginally positive, it is not sufficiently supportive of the economy as growth is poised to slip to a multi-year low for fiscal year 2019-20.
• A litany of tax sops outlined by the government for all segments of society was the only real highlight of the budget, following on from an earlier move to cut corporate taxes to provide a fillip to the sagging economy.
• The macro-economic assumptions are clearly too optimistic, and the government risks jeopardising its credibility as far as the revenue mobilisation efforts are concerned, when the authorities struggle to meet its tax target for yet another successive year.
• The government paid lip service to structural reforms with no references to the overhaul of labour laws, or reforms to improve the investment climate and attract more foreign investments.
• On the bright side, the quality of spending is poised to improve but the risk of a narrowing tax base threatens to constrain the government’s ability to stabilise the economy with counter-cyclical fiscal policy as institutionalised handouts pile on the spending pressures.
• More fundamentally, the budget reminds us of the structural weaknesses in the Indian economy. Disappointingly, the government has not offered a robust policy response.
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