Friday, August 20, 2021

Assessing Effects of the COVID-19 Pandemic on Country-wise Macroeconomic Performances


In an endeavor to fill the void in availability of comprehensive and yet all inclusive indicators for judging relative country performances on the economic front, we have introduced an indicator which allows a parsimonious representation of a variety of different facets of economic performance and its comparison across countries and is thus most useful in providing guidance to the relative stages of economic recovery around the globe.

Forward looking monthly economic indicators like, even the Purchasing Managers Indices (PMIs), estimated either officially by the government or agencies, become subject to a much greater degree of uncertainty during economic and financial crises. Survey based leading indicators like PMIs are crucial but they do not and cannot cover the entire spectrum of the actual economic variables. Alternatively, considering a range of official monthly indicators leave open important questions of addressing incommensurability among them, and also implicit weighting and aggregation methods for arriving at a comprehensive picture of macroeconomic performance. The need for a single measure, to compare all aspects of macroeconomic performance, is accentuated by the fact that policies pursuing different macroeconomic goals of growth and stability usually involve certain tradeoffs. In the wake of global crises it becomes even more important to consider tools for frequently comparing country-wise performances to evaluate and learn from experiences.

We take the composite indicators approach that consists in merging several available official monthly indicators of economic wellbeing and financial sector conditions, into a single metric. In the backdrop of the unprecedented crisis brought about by the COVID-19 outbreak, monthly rankings of 21 countries with comparable data on chosen variables reveal the severity of crisis across countries, the changing effects on economic wellbeing. The Rank Mobility Indices clearly show the adverse effect of the pandemic on emerging market economies, in the early stages of the pandemic, particularly when world trade and production lines had been impaired and also confirms that high levels of government debt can be debilitating specially under unprecedented circumstances like this pandemic when the private sector has been forced to downsize all over the globe.

As a composite indicator, the CPS is expected to reveal, more comprehensibly, than a plethora of indicators, the relative position of an economy at any point in time and provides us with a tool for continuous evaluation of relative economic performances of countries over time in crisis as also under normal circumstances. The TOPSIS ranking methodology is robust such that the choice of variables also can be modified according to the ready availability of coincident indicators or high frequency ones and/or to suit specific evaluation needs. CPS based rankings and the RMIs would help in assessing relative positions and provide readily a comprehensible picture of the global economy overall. We hope these monthly rankings would help policy makers, investors, and analysts to identify the short-term inter-temporal changes in country performances and offer some timely actionable intelligence over and above those provided by individual macro-financial indicators of countries.

The paper is available at

Saturday, May 9, 2020

Stimulus Packages to Tackle the Slowdown in the Economy

Relief Measures to Tackle the Covid19 Crisis
THE GLOBAL ECONOMY is facing an unprecedented crisis from the spread of Covid-19 throughout almost the entire world. The RBI noted that global economic activity has come to a near standstill as COVID-19 related lockdowns and social distancing are imposed across a widening swathe of affected countries. Expectations of a shallow recovery in 2020 from 2019’s decade low in global growth have been dashed. The outlook is now heavily contingent upon the intensity, spread and duration of the pandemic. There is a rising probability that large parts of the global economy will slip into recession. Even as scientists and doctors fight the battle with the unprecedented calamity, fiscal and monetary will have to take care of saving livelihoods and incomes. Below we outline some of the initial measures undertaken by some major central  banks and governments.
•       Fed funds rate at 0-0.25%. FOMC announced emergency rate cuts on March 3 and March 15, lowering the policy rate by -150 bps in total. The Fed funds rate range has returned to the lowest level after the global financial crisis in 2007/08.
•       Donald Trump signed the largest stimulus package in US history on Friday, a $2 trillion bill intended to rescue the coronavirus-battered economy. The package provides roughly $500 billion in loans and other assistance for major companies
•       The bill sets aside $350 billion for small business loans up to $10 million, with priority given to women-owned businesses, new businesses and those run by anyone “socially and economically disadvantaged.
•       The bill also sets aside $100 billion for hospitals and health providers as they struggle to meet the challenge of COVID-19 amid widespread shortages of personal protective equipment and depleted staffs.
•       The bill also includes a substantial additional $600 per week on top of existing state benefits to help the jobless navigate the crisis. Nearly one in five Americans had lost work as of mid-March — a number that’s likely going up.
•       The stimulus will include direct cash payments of $1,200 for adults and $500 for children in a move likely to include up to 94% of all tax filers.
•       The Fed has also revived the Term Asset-Backed Securities Loan Facility that focuses on small businesses and households. It provides direct funding to those willing to invest in financial instrument securitisations
•       On March 22, the U.S. Fed announced the Primary Market Corporate Credit Facility and a Secondary Market Corporate Credit Facility, that will support access to credit for large employers via the purchase of corporate debt.
At the March meeting, ECB left the deposit rate unchanged at -0.5%.
On March 18, the European Central Bank announced its Pandemic Emergency Purchase Programme. The significance of the PEPP is not just its massive corpus of €750 billion, but the fact that it has extended the list of eligible securities to all commercial paper of financial and non-financial companies. Thus, the European Central Bank would, in effect, be a direct lender to companies to meet their working capital needs.
The ECB has relaxed capital requirements for the sector — providing an estimated €120bn of capital relief that could fund €1.8tn of new loans. T
ECB launched new LTROs until June 2020 to fund banks’ liquidity needs. It also improved TLTRO-III by relaxing loan eligibility and increasing incentive rate, effective June 2020.
he ECB also said banks “should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020”. It added that they should “refrain from share buybacks aimed at remunerating shareholders”.  The freeze on distributing capital to investors was to “boost banks’ capacity by about 30 billion Euros to absorb losses and support lending to households, small businesses and corporates during the pandemic.
Bank of England Policymakers lowered the Bank rate by -65 bps in two emergency cuts this month, taking the policy rate to 0.1%, the lowest level on record.
Boosting the size of asset purchase by +200B pound, BOE has pledged to buy a total of 645 billion pound.
BOE also introduced a COVID-19 Corporate Financing Facility (CCFF) under which the central bank can directly purchases commercial paper issued by credit-worthy non-financial corporate who make “a material contribution to the UK economy”

Japan compiled a record $1.1 trillion economic stimulus package in April that focused on cash payouts to households and loans to small businesses hurt by the pandemic.

In India, fiscal policy makers have taken the first step of ensuring that the basic needs of most-vulnerable sections of the population are met during the lock-down:

·         1. Pradhan Mantri Gareeb Kalyan Anna Yojana: 800 million poor people in the country to get 5 kg of rice/wheat per month free of cost, in addition to the 5 kg they already get. Additionally, each household to get 1 kg of preferred dal for free for the next three months
·         2. Cash transfer scheme: Nine sub-parts
·         Farmers: First instalment of the PM-KISAN payment of Rs 2,000 to be frontloaded; move to benefit 87 million
·         MGNREGS: Wage increased from Rs 182 to Rs 202 per day. Wage increase to benefit 50 million families, as there will be about 2000 increase in their income
·         Poor widows, aged, and divyang: Ex-gratia of Rs 1,000 for the next three months, in two instalments. 30 million people to benefit. transfers to be done through direct benefits transfer (DBT)
·         Women with Jan Dhan Yojana accounts: 200 million to benefit from Rs 500 ex-gratia for the next 3 months
·         Beneficiaries of the Ujjwala scheme: 80 million households benefitted from the gas cylinders provided under the scheme. These beneficiaries will get free cylinders for three months in view of the disruption the coronavirus lockdown will cause.
·         Women in self-help groups: 6.3 million SHGs get up to Rs 10 lakh collateral-free loans under the Deen Dayal Upadhyaya National Rural Mission scheme. The cap has been doubled to Rs 20 lakh. The move will benefit 70 million households
·         Organised sector workers: Two parts to this. First, the Government of India will pay the EPF contribution of both employee and employer for the next three months. This will be for all those establishments which have up to 100 employees, 90 per cent of whom earn less than Rs 15,000 a month
·         And second, in what will benefit 8 million employees and 400,000 establishments, the EPFO regulation will be amended to allow the withdrawal of up to 75 per cent of their corpus as non-refundable advance, or three months' salary, whichever is less
·         Construction workers: States to be directed to utilise the Rs 31,000 crore welfare fund for building and construction workers for the benefit of 35 million workers in the midst of the coronavirus crisis
·         District medical fund: State govts to be urged to utilise this fund for medical screening, medical testing and providing health care services in the wake of the coronavirus crisis

The government is giving shape to a stimulus package that will be followed by a raft of reforms meant to help India capture opportunities. Business leaders and experts have sought a ₹10 trillion package to tide over a severe liquidity crisis caused by the lockdown imposed to battle covid-19 and provide funds to the poor for a recovery in demand for goods and services.

The Reserve Bank’s actions are to be regarded as a comprehensive package with force multipliers. The developmental and regulatory policies can be broadly delineated under four categories: (1) measures to expand liquidity in the system sizeably to ensure that financial markets and institutions are able to function normally in the face of COVID-19 related dislocations; (2) steps to reinforce monetary transmission so that bank credit flows on easier terms are sustained to all those who have been affected by the pandemic; (3) efforts to ease financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving access to working capital; and (4) endeavor to improve the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic.

MPC has agreed to reduce the policy repo rate by 75 basis points to 4.4 per cent. Policy rate corridor widened from 50 basis points to 65 bps. The fixed rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points to 4.0 per cent, thus creating an asymmetrical corridor. The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy.  On April 15, the amount absorbed under reverse repo operations was ₹6.9 lakh crore. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.

As announced on March 27, the RBI undertook three auctions of targeted long term repo operations (TLTRO), injecting cumulatively ₹75,041 crore to ease liquidity constraints in the banking system and de-stress financial markets. Another TLTRO auction of ₹25,000 crore will be conducted on April 17. In response to these auctions, financial conditions have eased considerably, as reflected in the spreads on money and bond market instruments. Moreover, activity in the corporate bond market has picked up appreciably, with several corporates making new issuances. There are also indications that redemption pressures faced by mutual funds have moderated. It has been decided to conduct TLTRO 2.0 for an aggregate amount of ₹50,000 crore, to begin with, in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. it has been decided to provide special refinance facilities for a total amount of ₹50,000 crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.

It has now been decided to increase the WMA limit of states by 60 per cent over and above the level as on March 31, 2020 to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to plan their market borrowing programmes better. The increased limit will be available till September 30, 2020.

Consistent with the globally coordinated action committed to by the Basel Committee on Banking Supervision to alleviate the impact of Covid-19 on the global banking system, additional regulatory measures are being announced. 

Monday, August 19, 2019

Highlights from the Economic Survey, 2019 & the Union Budget, 2019-20

       Following are some Highlights from the Economic Survey, 2019:
State of the Economy in 2018-19: A Macro View
  • India is still the fastest growing major economy in 2018-19.
·         India needs to grow at 8% per year to be $5 trillion economy by FY25. 
  • Growth of GDP moderated to 6.8 per cent in 2018-19 from 7.2 per cent in 2017-18. Economic Survey predicts 7% growth rate for this fiscal.
  • Inflation contained at 3.4 per cent in 2018-19.
  • Non-Performing Assets as percentage of Gross Advances reduced to 10.1 per cent at end December 2018 from 11.5 per cent at end March 2018.
  • Investment growth recovering since 2017-18: Growth in fixed investment picked up from 8.3 per cent in 2016-17 to 9.3 per cent next year and further to 10.0 per cent in 2018-19.
  • Current account deficit manageable at 2.1 percent of GDP.
  • Fiscal deficit of Central Government declined from 3.5 percent of GDP in 2017-18 to 3.4 percent in 2018-19.
  • Prospects of pickup in growth in 2019-20 on the back of further increase in private investment and acceleration in consumption.
Fiscal Developments
  • FY 2018-19 ended with fiscal deficit at 3.4 per cent of GDP and debt to GDP ratio of 44.5 per cent (Provisional).
  • As per cent of GDP, total Central Government expenditure fell by 0.3 percentage points in 2018-19 PA over 2017-18: 0.4 percentage point reduction in revenue expenditure and 0.1 percentage point increase in capital expenditure.
  • States’ own tax and non-tax revenue displays robust growth in 2017-18 RE and envisaged to be maintained in 2018-19 BE.
  • The revised fiscal glide path envisages achieving fiscal deficit of 3 per cent of GDP by FY 2020-21 and Central Government debt to 40 per cent of GDP by 2024-25.
Money Management and Financial Intermediation
  • Insolvency and Bankruptcy Code led to recovery and resolution of significant amount of distressed assets and improved business culture. Till March 31, 2019, the CIRP yielded a resolution of 94 cases involving claims worthINR1, 73,359 crore. As on 28 Feb 2019, 6079 cases involving INR2.84 lakh crores have been withdrawn. As per RBI reports, INR50,000 crore received by banks from previously non-performing accounts. Additional INR50,000 crore "upgraded" from non-standard to standard assets.
  • Benchmark policy rate first hiked by 50 bps and later reduced by 75 bps last year.
  • Liquidity conditions remained systematically tight since September 2018 thus impacting the yields on government papers.
  • Financial flows remained constrained because of decline in the equity finance raised from capital markets and stress in the NBFC sector.Capital mobilized through public equity issuance declined by 81 per cent in 2018-19. Credit growth rate y-o-y of the NBFCs declined from 30 per cent in March 2018 to 9 per cent in March 2019.
Prices and Inflation
  • Headline inflation based on CPI-C continuing on its declining trend for fifth straight financial year remained below 4.0 per cent in the last two years.
  • Food inflation based on Consumer Food Price Index (CFPI) also continuing on its declining trend for fifth financial year has remained below 2.0 per cent for the last two consecutive years.
  • CPI-C based core inflation (CPI excluding the food and fuel group) has now started declining since March 2019 after increment during FY 2018-19 as compared to FY 2017-18.
  • Miscellaneous, housing and fuel and light groups are the main contributors of headline inflation based on CPI-C during FY 2018-19 and the importance of services in shaping up headline inflation has increased.
  • CPI rural inflation declined during FY 2018-19 over FY 2017-18. However, CPI urban inflation increased marginally during FY 2018-19. Many States witnessed fall in CPI inflation during FY 2018-19.
External Sector
  • As per WTO, World trade growth slowed down to 3 per cent in 2018 from 4.6 per cent in 2017. Reasons: Introduction of new and retaliatory tariff measures; Heightened US-China trade tensions; Weaker global economic growth; Volatility in financial markets.
  • In Indian rupee terms growth rate of exports increased owing to depreciation of the rupee while that of imports declined in 2018-19. 
  • Net capital inflows moderated in April-December of 2018-19 despite robust foreign direct investment (FDI) inflows, outweighed by withdrawals under portfolio investment.
  • India’s External Debt was US$ 521.1 billion at end-December 2018, 1.6 per cent lower than its level at end-March 2018.
  • The key external debt indicators reflect that India’s external debt is not unsustainable.
  • The total liabilities-to-GDP ratio, inclusive of both debt and non-debt components, has declined from 43 per cent in 2015 to about 38 per cent at end of 2018.
  • The share of foreign direct investment has risen and that of net portfolio investment fallen in total liabilities, reflecting a transition to more stable sources of funding the current account deficit.
  • The Indian Rupee traded in the range of 65-68 per US$ in 2017-18 but depreciated to a range of 70-74 in 2018-19.
  • The income terms of trade, a metric that measures the purchasing power to import, has been on a rising trend, possibly because the growth of crude prices has still not exceeded the growth of India’s export prices.
  • The exchange rate in 2018-19 has been more volatile than in the previous year, mainly due to volatility in crude prices, but not much due to net portfolio flows.
  • Composition of India’s exports and import basket in 2018-19(P):
    • Exports (including re-exports): INR23, 07,663 Cr.
    • Imports: INR35, 94,373 Cr.
    • Top export items continue to be Petroleum products, precious stones, drug formulations, gold and other precious metals.
    • Top import items continue to be Crude petroleum, pearl, precious, semi-precious stones and gold.
    • India’s main trading partners continue to be the US, China, Hong Kong, the UAE and Saudi Arabia.
  • India has signed 28 bilateral / multilateral trade agreements with various country/group of countries. In 2018-19,
    • Exports to these countries stood at US$121.7 billion accounting for 36.9 per cent of India’s total exports.
    • Imports from these countries stood at US$266.9 billion accounting for 52.0 per cent of India’s total imports.

  • Agriculture sector in India typically goes through cyclical movement in terms of its growth.
    • GVA in agriculture improved from a negative 0.2 per cent in 2014-15 to 6.3 per cent in 2016-17 but decelerated to 2.9 per cent in 2018-19.
  • GCF in agriculture as percentage of GVA marginally declined to 15.2 per cent in 2017-18 as compared to 15.6 per cent in 2016-17.
  • The public sector GCF in agriculture as a percentage of GVA increased to 2.7 per cent in 2016-17 from 2.1 per cent in 2013-14.

Industry and Infrastructure
  • Overall Index of Eight Core Industries registered a growth rate of 4.3 percent in 2018-19.
  • Rail freight and passenger traffic grew by 5.33 per cent and 0.64 per cent respectively in 2018-19 as compared to 2017-18.
  • Total telephone connections in India touched 118.34 crore in 2018-19
  • The installed capacity of electricity has increased to 3, 56,100 MW in 2019 from 3, 44,002 MW in 2018.
·         Policy should enable MSMEs to grow, create greater profits for their owners and contribute to job creation and productivity in the economy. 
  • Public Private Partnerships are quintessential for addressing infrastructure gaps.
  • Institutional mechanism is needed to deal with time-bound resolution of disputes in infrastructure sector.
Services Sector
  • Services sector (excluding construction) has a share of 54.3 per cent in India’s GVA and contributed more than half of GVA growth in 2018-19.
  • The services sector growth declined marginally to 7.5 per cent in 2018-19 from 8.1 per cent in 2017-18.
    • Accelerated sub-sectors: Financial services, real estate and professional services.
    • Decelerated sub-sectors: Hotels, transport, communication and broadcasting services.
Following are some Highlights from the Union Budget, 2019-20:

·         Tax rate reduced to 25% for companies with annual turnover up to Rs. 400 crore.
·         To discourage the practice of making business payments in cash the government proposes to levy TDS of 2% on cash withdrawal exceeding Rs 1 crore in a year from a bank account.
·         No change in income tax slabs. However, surcharge has been increased for those earning 2-5 crore and those earning 5 crore and above. The effective tax rate for these categories will increase by around 3% and 7%, respectively. The surcharge increases the effective tax rate for most FPIs, set up as Trusts or AOPs, by almost 7 per cent. 30-40% of about 9,400 FPIs registered in Indiawill be affected.
·         Those who don’t have PAN can file tax returns using Aadhaar. The two are effectively made interchangeable.
·         Additional deduction up to Rs. 1.5 lakh for interest paid on loans borrowed up to 31st March, 2020 for purchase of house valued up to Rs. 45 lakh. Overall benefit of around Rs. 7 lakh over loan period of 15 years. 
·         Listed companies shall also be liable to pay additional tax at 20 percent in case of buyback of shares, as is the case currently for unlisted companies.

Boost to Electric Vehicles
·       Additional income tax deduction of Rs. 1.5 lakh on interest paid on electric vehicle loans.
·       Customs duty exempted on certain parts of electric vehicles. 

Relief for Start-ups
·         Capital gains exemptions from sale of residential house for investment in start-ups extended till FY21. 
·         Angel tax issue resolved as start-ups and investors filing requisite declarations and providing information in their returns not to be subjected to any kind of scrutiny in respect of valuations of share premiums. 
·         Funds raised by start-ups to not require scrutiny from Income Tax Department 
·         E-verification mechanism for establishing identity of the investor and source of funds. 
·          No scrutiny of valuation of shares issued to Category-II Alternative Investment Funds. 
·         Relaxation of conditions for carry forward and set off of losses. 

Securities Transaction Tax (STT)
·         STT restricted only to the difference between settlement and strike price in case of exercise of options. 

Customs Duty
·         Basic Customs Duty increased on cashew kernels, PVC, tiles, auto parts, marble slabs, optical fibre cable, CCTV camera etc. 
· Exemptions from Custom Duty on certain electronic items now manufactured in India withdrawn. 
·         Exemptions from Custom Duty on certain electronic items now manufactured in India withdrawn. 
·         Customs duty reduced on certain raw materials such as: 
o Inputs for artificial kidney and disposable sterilised dialyser and fuels for nuclear power plants etc. 
o Capital goods required for manufacture of specified electronic goods. 
·         Defence equipment not manufactured in India exempted from basic customs duty.
·         Increase in Special Additional Excise Duty and Road and Infrastructure Cess each by Rs. 1 per litre on petrol and diesel.
·         Custom duty on gold and other precious metals increased. 

           Banking and Finance

·         Rs. 70,000 crore proposed to be provided to PSBs to boost credit. 
·         For buying “high-rated pooled assets of financially sound NBFCs” that amounts to Rs 1 lakh crore in FY20, the government will offer partial credit guarantee to PSBs, of six months for one time for first loss of up to 10 per cent.
·         Repealing of creating a debenture redemption reserve (DRR) for NBFCs to raise capital in public issues.
·         Interest income on bad or doubtful debts made by NBFCs to be taxed on receipt basis instead of accrual basis to provide a level playing field to NBFCs since for scheduled banks, public financial institutions, state financial corporations, state industrial investment corporations, etc., interest on bad or doubtful debts is charged to tax on receipt basis.
·         Rs 350 crore earmarked by the government for interest subvention of GST-registered MSMEs for fresh and incremental loans.
·         The Finance Minister also proposed bringing the housing finance companies (HFCs) directly under the RBI to strengthen the central bank’s regulatory authority over all NBFCs. Currently, HFCs are regulated by the National Housing Bank, an RBI subsidiary. 
·         Speed up the enactment of appropriate legislations to create an International Financial Services Centre (IFSC) authority. IFSC enables bringing back the financial services and transactions that are currently carried out in offshore financial centers by Indian corporate entities and overseas branches and subsidiaries of financial institutions (FIs) to India The government proposed to provide several direct tax incentives to an IFSC. This would include 100 % profit-linked deduction under section 80-LA in any ten-year block within a fifteen-year period, exemption from dividend distribution tax from current and accumulated income to companies and mutual funds,exemptions on capital gain to Category-III AIF and interest payment on loan taken from non-residents.
·         To reduce the Net-owned fund Requirement from Rs 5,000 crore to Rs 1,000 crore for foreign re-insurers.
·         The government is setting an enhanced target of Rs 1,05,000 crore for disinvestment during FY20 and will continue with disinvestment of PSUs in the non-financial space as well.
·         Government to reinitiate the process of strategic disinvestment of Air India, and to offer more CPSEs for strategic participation by the private sector.

             Social and Rural Sectors
·         To streamline multiple labour laws into a set of four labour codes.
·         To expand self help groups to all districts; one woman in every SHG to get loan upto Rs 1 lakh under Mudra Yojana.
·         Pension benefits will be offered to 3 crore shopowners with annual turnover of less than Rs 1.5 crore.
·         Scheme of Fund for Upgradation and Regeneration of Traditional Industries. (SFURTI)
·         Common Facility Centres (CFCs) to be setup to facilitate cluster based development for making traditional industries more productive, profitable and capable for generating sustained employment opportunities.
·         100 new clusters to be setup during 2019-20 with special focus on Bamboo, Honey and Khadi, enabling 50,000 artisans to join the economic value chain.
·         10,000 new Farmer Producer Organizations to be formed, to ensure economies of scale for farmers.
·         Government to work with State Governments to allow farmers to benefit from e-NAM.
Zero Budget Farming in few states where farmers are already being trained to be replicated in other states.

Sunday, May 12, 2019

Alarm Bells for the Indian Economy

Even as the world’s largest democracy is taken up with the choice of the next Government, issues of a major slowdown in the Indian economy can probably no longer be ignored.  Both macro data like household savings and micro data like sector and company volumes showed Indian households may have cut consumption due to slow income growth, analysts said. The decline in demand stems from —an income growth slump in urban and rural areas that has forced people to curb spending, falling money supply in the economy since 2016, and rising uncertainty over the future of the economy. Demand side indicators of private consumption, capital spending and exports have all been slowing over several quarters. Immediate signs of distress are visible in the FMCG and auto sectors, both major drivers and indicators of India’s growth. Brokerages have started to issue warnings of a serious demand slowdown in consumer segments. Volume growth at leading FMCG companies that derive more than a third of sales from rural areas has dropped to a six-quarter low.
The slowdown is clearly visible not just in the sales projection of consumer goods companies but the major automakers for the month of April. Car sales grew 2.7 per cent in 2018-19, the worst performance in five financial years, data released by the Society of Indian Automobile Manufacturers (Siam) showed. Maruti Suzuki India (MSI) and Hyundai Motor India reported a decline in their domestic sales in April with 18.7 per cent fall and 10.1 per cent degrowth, respectively. MSI’s volumes dropped 17.2 per cent in April, the sharpest decline since August 2012. The sector is partially affected by the fact that customer response to price changes due to new regulatory norms pertaining to emissions is unknown. Similarly, the cumulative sales of the top six two-wheeler manufacturers declined to nearly 1.58 million units last month, from 1.88 million units during the same period a year ago. The story isn’t different for tractor sales also, where the fourth quarter saw a contraction of 5.78 per cent, with sales registering the weakest growth in three years. These three together indicates urban, semi-urban and rural demand.
India’s factory output entered negative territory in March after a gap of 21 months, contracting 0.1 per cent to signal a slowdown in consumption, as well as investment. Manufacturing, with 78 per cent weightage in the IIP, contracted 0.4 per cent in March, while mining and electricity grew 0.8 per cent and 2.2 per cent, respectively. The growth rate of India's factory production was flat in February 2019 as it inched up by just 0.1 per cent from 6.9 per cent reported for the corresponding month of 2018, as manufacturing output slipped 0.3 per cent. The Nikkei India Manufacturing PMI declined from 52.6 in March to 51.8 in April. This was weaker than the average for the 14-year survey history. A softer increase in new orders created a domino effect in the Indian manufacturing industry, restricting growth of output, employment, input buying and business sentiment, according to the PMI report. India's service sector activity slipped to a seven-month low in April as the Nikkei India Services PMI dropped to 51 in April from 52 in March, underscoring that the sector is losing momentum. Finally, even the Finance Ministry's monthly report acknowledges—India's economy slowed down slightly in the last fiscal due to declining growth in private consumption, slow increase in fixed investment and muted exports though it is still fastest growing major economy.
However, the fastest growing tag, in a situation where China is striving for policy driven slowdown to sustainable levels, will not cover up the realities on the ground for long. The World Bank's lower middle income range for countries is defined as per capita GNI of between $996 and $3,895. As per 2017 figures, the income of an average Indian was in the vicinity of $1,795, which placed the country well below the halfway mark, data from Bloomberg shows. During the same period, the comparable figure for China stood at $8,690, which put it well above the halfway mark in the upper middle income range — defined as GNI per capita between $3,89. Oxfam's Global Inequality Report 2018 showed that 73 per cent of the wealth generated in India in 2017-2018 went to the richest 1 per cent of the Indian population, while the poorest 50 per cent saw a marginal increase of 1 per cent in their wealth over the same period. All in all whom so ever takes charge of the Indian economy after the 23rd of May has a serious task ahead of them in completely rethinking polices and implementation thereof, particularly those related to investment, meaningful job creation and rural distress, and all so probably at the cost of fiscal slippage.