By Satyaki Chakraborty
The first year of the second term of the Narendra Modi Government is going to witness the lowest GDP growth of 6.7 per cent in the last six years. The economic crisis has accentuated in the last two years and despite all the talk of increasing the income of the farmers and the rural poor by the BJP government, the rural income has been falling and accompanied by the pressure on urban earnings due to job crisis, is contributing to acute pressure on aggregate demand.
According to the Macro Tracker of the business daily Mint, the Indian economy continued to slow down in July this year with most indicators of domestic demand still flashing red in June. July was the third month in a row that exactly half of the 16 indicators were in the red below the five year average trend. Only seven indicators remained above the average. The disquieting feature of the trends is that the consumer economy continues to remain the weakest spot, with all four major indicators, passenger vehicle sales, tractor sales, two wheeler sales and air passenger growth showing red for the sixth consecutive month. If this continues, the Indian economy will enter the period of recession in the current fiscal itself.
India Ratings and Research (Fitch Group) has revised India’s FY20 gross domestic product (GDP) growth downwards to 6.7 per cent (six-year low) from its earlier forecast of 7.3 per cent. The agency expects FY20 to be the third consecutive year of subdued growth pushed by (i) a slowdown in consumption demand; (ii) delayed and uneven progress of monsoon so far; (iii) decline in manufacturing growth; (iv) inability of Insolvency and Bankruptcy Code to resolve cases in a time-bound manner, and (v) rising global trade tension adversely impacting exports. Even on a quarterly basis, 1QFY20 is expected to be the fifth consecutive quarter of declining GDP growth as Ind-Ra expects it to come in at 5.7 per cent.
On August 23 this year, Finance Minister Nirmala Sitharaman announced a slew of measures to revive the economy, which included addressing some of the woes facing auto sector, MSME, banking sector, capital market, etc. However, these measures are likely to support growth only in the medium term, but the agency expects GDP growth to recover to 7.4 per cent in the 2HFY20, mainly on account of the base effect.
Private consumption, which has been the mainstay of aggregate demand, has in fact come under pressure in urban as well as rural areas lately. While the reduced income growth of households has taken the sting out of the urban consumption, drought/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption.
Even investment, particularly private corporate investment, has remained sluggish over the past few years. However, average investment growth, largely constituting government and corporate sector maintenance capex, at 9.2 per cent during FY17-FY19 looks healthy vis-à-vis the average investment growth of 3.6 per cent during FY14-FY16. Incremental or greenfield private corporate capex, although, is still missing.
Since the major contributors to the economy’s investment pie are households (which include unorganised and unregistered enterprises, 38.6 per cent) and private corporations (37.9 per cent), their spending hold the key for reviving broad-based investment activity in the economy. While households’ major investment is in real estate, that of private corporation is in machinery and equipment. Given the stress in the real estate sector and manufacturing sector capacity utilisation hovering in 70 per cent-76 per cent range since FY14, Ind-Ra believes revival of private investment demand will be a long drawn process.
As India Ratings sees it, of the other two demand-side growth drivers, government expenditure continues to be steady and is expected to grow at 10.6 per cent in FY20 (FY19: 9.2 per cent) while exports is facing headwinds due to rising trade tensions/weakening global GDP growth and is expected to grow at a subdued 7.2 per cent in FY20.
Due to delayed and uneven monsoon, Ind-Ra expects agricultural gross value added (GVA) to grow at 2.1 per cent in FY20, lower than FY19’s 2.9 per cent. Overall GVA is expected to grow at a six-year low of 6.5 per cent in FY20 (FY19: 6.6 per cent), driven by services (7.9 per cent) and industry (6.1 per cent).
Food and crude oil prices, key drivers of inflation in India, are currently benign and likely to remain so during the remainder FY20. Ind-Ra expects inflation based on Wholesale Price Index and Consumer Price Index to remain moderate at 3.2 per cent and 3.8 per cent, respectively, in FY20 (FY19: 4.3 per cent and 3.4 per cent). This, the agency believes, will provide headroom to the Reserve Bank of India (RBI) to continue with its accommodative policy stance, thereby resulting in scope for more rate cuts in the near term (notwithstanding the 110 basis points rate cut so far in 2019). As a result, the 10-year G-Sec bond yield is expected to trade in the range of 6.1 per cent-6.2 per cent by FYE20.
FY20 fiscal deficit has been budgeted at 3.3 per cent of GDP. In Ind-Ra’s assessment, tax revenue in FY20 may fall short by around INR1,500 billion from the budgeted figure, similar to the tax revenue shortfall observed in FY19. However, in view of RBI deciding to transfer INR1,760.51 billion (INR1,234.14 billion surplus for FY19 and INR562.37 billion of excess provision) to the government, achieving FY20 fiscal deficit target will not be difficult.
The transfer of RBI reserves to pep up the Centre’s finances can only act as a palliative as the structural problems are basic. But Modi Government is refusing to recognize the severity of the crisis and trying to divert the attention to other issues. (IPA Service)