INDIA OUTLOOK 2019: CRISILS
With the Indian economy caught in crosswinds, we now expect gross domestic product (GDP) to grow 6.9% this
fiscal, or 20 basis points lower than what we had envisaged earlier.
The revision factors in a triangulation of downside risks: inadequate monsoon, slowing global growth, and sluggishhigh-frequency data for the first quarter.
The slowdown would be pronounced in the first half, while the second half should find support from monetaryeasing, consumption and statistical low-base effect.
Agricultural terms of trade are also expected to improve with a pick-up in food inflation. In addition, farmers would benefit from income transfer of Rs 6,000 per year announced by the Centre, and farm loan waivers in a few states.
Policy action looks attuned to consumption than investment demand, which means consumption will be the first toascend as the tide turns.
But all that might not be enough to pitchfork growth this fiscal to, or above, the past 14-year average of 7% perannum.
So what is behind the slackening?
GDP grew at an impressive 8.2% in fiscal 2017, the fastest in a decade. Then a cyclical downturn got triggeredbecause of disruptions wrought by policy initiatives and reforms, and rising global uncertainty stemming from trade disputes.
Weak global growth and falling trade intensity shrank India’s overall exports pie, and a gradual pick-up in crude oil prices fanned further headwinds. The rollout of Goods and Services Tax (GST) also had a knock-on effect on exports growth in the year of implementation because of delay in refunds to exporters.
Simultaneously, the farm front continued to flounder. Terms of trade for agriculture deteriorated in fiscals 2018 and2019, and weak wage growth further affected rural incomes.
In all that time, public sector banking also remained incapacitated, primarily because of rising bad loans.
The onset of the non-banking financial company (NBFC) crisis in September 2018 aggravated the situation. Given that NBFC penetration is high in certain household consumption segments, the stress that ensued furtherimpacted demand.
With access to funding becoming challenging and NBFCs caught up in managing liquidity, their growth halved to a multi-year low in the second-half of last fiscal, and remains impacted.
On the bright-side, banking sector non-performing assets (NPAs) are expected to decline anew to ~8% by March2020, given lower accretion and increased recoveries. Credit growth should also grind up to 14%, the highest in five fiscals. Seasoning of retail portfolio and performance of the small and medium enterprise (SME) portfolio after therestructuring period will be the key monitorables.
Growth for NBFCs, mainly in the retail segment, is expected to pick up gradually. Also, NBFCs have used thisopportunity to correct their asset-liability mismatches, and have reduced reliance on short-term market borrowings, which is a structural positive for the sector.
At the same time, funding access has not normalised for the sector, and asset quality risks in the wholesale book, especially developer funding, have increased.
Also, corporate revenue is set to grow at a slower 7.5-8.0% this fiscal, reversing the trend of double-digit growth in the past two fiscals.
A trifecta – of spurt in cost of compliance because of changes in regulation, tightening liquidity, and moderating income growth – is expected to impact sales volume in the automobiles sector. And how farm incomes pan out will weigh on rural demand-driven segments.
In other words, most consumption segments will pull revenue growth into single digit this fiscal. And weak prices ofcommodities such as steel and crude oil would exacerbate the pain.
As for industrial capex, it would remain moderate given the weak demand. Over the past few years, infrastructure investments (including public and private) have driven capex. But over the next three years, lower spending, such as on roads, is expected to drag growth in infrastructure investments to ~6% compound annual growth rate (CAGR)over the next three fiscals compared with 10% in the last three fiscals.
With public spending continuing to dominate investments, funding will remain a monitorable. This is also important because entities behind major infrastructure investments such as the National Highways Authority of India haverun up debt significantly in the past few years.
And how has policy responded to the ructions?
Monetary policy has focused on inflation control ever since the inflation targeting framework was adopted.
To be sure, given our history, high core inflation rates, and the difficulty in assessing inflation (it has surprisedon the downside), caution was warranted on rate cuts because of the chance of a spike in high real interestrates. In hindsight, however, one could say policy was tighter than warranted by the inflation trajectory. To boot,transmission of rate cuts is also chronically sluggish.
Fiscal policy, on the other hand, has had low wherewithal to pump the prime, given the glide path set out by the Fiscal Responsibility and Budgetary Management Act.
The upshot? GDP growth falling to a 20-quarter low of 5.8% in the last quarter of fiscal 2019. If it’s any consolation, in the last seven fiscals, there have been seven instances when quarterly GDP growth fell below 6%.
The crucial question, therefore, is whether a trough is in sight.
Given the fiscal constraints, public spending is unlikely to have the heft to pull growth above 7%.
And some of the recent, and much-needed, reforms would pay off only over the medium term.
There would, therefore, be some near-term onus on monetary policy to stimulate growth. But how effective that can be is the big question.
So fingers crossed for now.