August 2019 Review of Indian Economy: Macro-economic Performance

by Manasi Swamy

Slowdown tightens grip

The economic slowdown is turning out to be stronger than anticipated. Its signs are now everywhere. From deceleration in the first quarter volume growth of FMCG companies to slump in growth of cement production; from production fall in 60 per cent of the sub-groups of the manufacturing IIP in June 2019 to continuous slump in automobile sales for a year; from 0.35 million job cuts in the automobile and ancillary industries to low rural wages; from fall in petroleum products consumption to slowdown in railway, port and air traffic in the June 2019 quarter; from slowing capital investments to low core inflation.

The recent trends in fast frequency indicators and the anecdotes suggest that the GDP growth in the first quarter of 2019-20 will be around 5.7 per cent. The growth in the preceding quarter was also of the same order. And, it was the lowest growth in the last five years.

The prospects of the Indian economy in the remaining three quarters of 2019-20 look grim too. Flood-like situation in some states due to the recent downpour and a 5.3 per cent y-o-y fall in kharif sowing as of August 9, 2019 suggest that farm output will be low this year. This, along with the marginal increase in minimum support prices (MSPs) is expected weigh on rural consumption demand.

Consumption demand in urban India is expected to get hit due to job cuts in the automobile industry, lack of investment interest by the private sector which compromises future job opportunities, weak consumer sentiments and bearish movement in the stock market.

Interest of private corporates in fresh capacity creation has already dropped due to excess capacity and falling returns on capital investments. They are unlikely to kick start fresh projects till they see clear signs of a sustainable pick-up in demand. The government wants to remain committed to its fiscal target and so far has not shown any will to provide a fiscal push to the sagging economy. The Reserve Bank of India (RBI) has done its bit by cutting policy rates. But, slow transmission of rate cuts by the banks and their cautious approach towards lending due to NPAs remain a hurdle for spurring growth.

We expect GDP growth during 2019-20 to be in the range of 6.5 to 6.7 per cent, lower than the 6.8 per cent growth clocked in 2018-19.

Fiscal control: A bane for the sagging economy

The central government managed to keep its gross fiscal deficit under control in the first quarter of 2019-20. The deficit amounted to Rs.4.3 trillion, showing only a meagre 0.7 per cent increase over the year-ago quarter. As a proportion of the annual budgeted fiscal deficit, the deficit during April-June 2019 amounted to 61.4 per cent. This proportion was much higher at 68.7 per cent at the same time last year.

The government arrested the fiscal deficit not because of a pick-up in revenues, but through curtailment of expenditure. During April-June 2019, the government’s non-debt receipts grew by a meagre four per cent to Rs.2.9 trillion. Of this, the single largest revenue source - net tax receipts rose by a modest six per cent to Rs.2.5 trillion.

The government reined in its expenditure, particularly capital expenditure. During April-June 2019, government expenditure increased by just two per cent. Of this, revenue expenditure rose by 6.1 per cent to Rs.6.6 trillion, entirely driven by a robust 30 per cent increase in three major subsidies - food, oil and fertiliser. A large chunk of this went towards clearing the subsidy dues rolled over from last year. Capital expenditure slid y-o-y by 27.6 per cent to Rs.630 billion during the June 2019 quarter.

Maintaining fiscal discipline through curtailment of capital expenditure is counterproductive for the slowing economy. Corporate sector has already lost its appetite for fresh investments.

On one hand, number of voices demanding a fiscal push are increasing, and on the other, meeting the existing fiscal deficit target itself has become a difficult task for the government. To achieve its tax receipts target, the government has to grow its net tax receipts by 16.5 per cent during July 2019-March 2020. This is an uphill task amid the slowing economic conditions and also given the fact that tax collections grew by only six per cent in the first three months of 2019-20. It is apparent that to stick to its fiscal deficit target of Rs.7.04 trillion for 2019-20, the government will have to cut its capital expenditure. This will make things worse for the sagging economy.

Repo cut not enough for credit pick-up

Year-on-year growth in outstanding non-food credit disbursed by the scheduled commercial banks (SCBs) has been slowing since December 2018. From 15.1 per cent on December 21, 2018, it declined to 12.1 per cent by July 19, 2019.

The RBI cut the policy repo rate by 35 basis points to 5.40 per cent in its 3rd bi-monthly policy review on August 7, 2019. This was done with a hope that the credit growth and subsequently the economic growth will revive soon on the back of easy and cheaper money availability.

Since January 2019, the RBI has cut repo rate by 110 basis points. The banks, however, reduced their weighted average lending rates (WALRs) on fresh loans by only 29 basis points during February-June 2019. Bank’s cost of funds has not fallen significantly since bank deposits face tough competition from high-yielding small savings.

Nudged by the RBI, large public sector banks - State Bank of India, Bank of India, Syndicate Bank, IDBI Bank, Allahabad Bank, Bank of Maharashtra and Oriental Bank of Commerce cut their marginal cost of funds-based lending rate (MCLR) in the range of 5 to 25 basis points in August 2019.

But, it will be too naive to expect a pick-up in bank lending only due to the rate cuts. There are demand side issues which are weighing on the credit growth. Corporates, which are saddled with excess capacity, are not going to make fresh investments until they foresee a sustainable pick-up in demand. Hence, we expect demand for bank borrowings across industries to remain subdued.

For the retail loans growth to pick up, new people need to join the spending stream. This requires fresh employment generation, which is currently moving in the slow lane. Besides, banks have turned cautious on granting retail loans after the RBI’s warning about slippages in retail portfolios.

SEBI’s direction to large corporates to meet 25 per cent of their funding requirement through short-term instruments from April 2019 and the RBI’s restriction on banks to lend to only those NBFCs which enjoy investment rating of A+ or above are also contributing to the weakness in bank credit growth.

Retail price inflation low and stable

Retail price inflation remained stable in July 2019 at 3.15 per cent as compared to 3.18 per cent in June 2019. Food & beverages inflation was almost unchanged at 2.3 per cent from the preceding month. Fuel prices declined year-on-year for the first time since January 2012, as oil marketing companies slashed non-subsidised LPG prices by Rs.100 per 14.2 kg cylinder with effect from July 1, 2019. The LPG price cut was in line with the fall in prices in the international market.

The downward pressure on headline inflation from fuel price fall was offset by a steep jump in gold price inflation to 11.3 per cent in July 2019 from 6.3 per cent in June 2019. Globally, gold prices climbed to USD 1,413 per troy ounce in July from USD 1,359 per troy ounce in June, as investors shunned riskier assets in favour of the yellow metal, which is considered as a safe heaven. Gold being an import intensive commodity, prices mimicked the global trend in the domestic market.

Inflation in clothing & footware increased by 13 basis points to 1.65 per cent in July 2019. The rise was mainly a low-base effect.

Going forward, we expect inflation to crawl up slowly. Food inflation is expected to rise because of weak kharif sowing and supply disruptions caused by heavy downpour in some states.

Fuel inflation is likely to remain in the negative zone for a while as non-subsidised LPG prices have been cut further by Rs.65.2 per cylinder with effect from August 1, 2019. Internationally, oil prices are expected to remain subdued, which coupled with the weak demand, will keep inflation in transport services under check.

Core inflation is likely to move up, owing to the low base in the second half of 2019-20. However, the rise will be marginal as companies have lost their pricing power due to weak demand conditions in the domestic as well as the overseas market.

We expect consumer price inflation to average at 3.8 per cent in 2019-20. Although a little higher than last two years, inflation will be well below the Reserve Bank of India’s comfort level of four per cent.

External balance favourable

India’s merchandise trade deficit amounted to USD 45.99 billion during the first quarter of 2019-20. This is almost in line with our forecast of USD 45.7 billion.

Both, exports and imports shrunk by 1.2 per cent in the June 2019 quarter. Softer oil prices did contribute to the fall. But, the fall was largely a reflection of weakening demand in the domestic as well as the overseas market. Exports of non-petroleum products declined y-o-y by 0.9 per cent, while imports of non-petroleum non-gold items contracted by 5.3 per cent in the June 2019 quarter.

Services exports on a net basis amounted to USD 12.8 billion during April-May 2019, which too was as we had anticipated. We had projected services exports during the June 2019 quarter to measure USD 20.4 billion.

Financial inflows in the first quarter were much higher than we had expected. Net inflows of foreign direct investments (FDI) surged to an 11-quarter high of USD 14.5 billion during April-June 2019, while net inflows of foreign portfolio investments (FPIs) amounted USD 3.9 billion. Dollar inflows via external commercial borrowings (ECBs) too remained healthy as companies tried to reap benefits of near-zero real interest rates in the overseas market.

After meeting its current liabilities, India managed to add USD 158 billion to its forex reserves kitty during the June 2019 quarter.

Slowing domestic demand, softer crude oil prices and weakening domestic currency are likely to ensure that India’s current account deficit (CAD) remains under check in the remaining part of 2019-20. We expect the year to end with CAD at USD 41.9 billion, or 1.4 per cent of GDP. This is lower than the 2.1 per cent CAD-to-GDP ratio seen in 2018-19.

FPIs dumped Indian equities in July 2019, following the announcement of hike in surcharge on income of individuals earning Rs.20 million or more annually in the Union Budget 2019-20. Fears of intensification of trade war between China and the US increased, after fresh threat of tariff imposition on Chinese imports from the US president Donald Trump. This made FPIs exist riskier assets and rush to the safe heaven - gold. Given the unrealistically high valuations of Indian equities and slowing economic growth, FPI inflows in equities are expected to remain subdued going forward.The FPIs, however, will continue to invest in Indian debt securities.

FDI inflows are expected to remain strong during the remaining part of 2019-20. Even in a midst of a slowdown, India remains one of the fastest growing economy in the world. Hence, it continues to remain an ideal destination for MNCs.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.8 +2.1
Consumer Sentiments Index
Base September-December 2015
51.8 +0.3
Consumer Expectations Index
Base September-December 2015
53.6 0.0
Current Economic Conditions Index
Base September-December 2015
48.9 +0.9
Quarterly CapEx Aggregates
(Rs.trillion) Dec 19 Mar 20 Jun 20 Sep 20
New projects 5.56 4.02 0.78 0.82
Completed projects 1.67 1.78 0.25 0.69
Stalled projects 0.61 0.73 0.11 0.08
Revived projects 0.82 0.42 0.68 0.36
Implementation stalled projects 0.13 10.04 0.09 0.05
Updated on: 05 Dec 2020 3:28PM
Quarterly Financials of Listed Companies
(% change) Dec 19 Mar 20 Jun 20 Sep 20
All listed Companies
 Income -1.7 -5.0 -27.6 -6.2
 Expenses -2.2 -1.9 -27.9 -10.1
 Net profit -10.9 -48.2 -40.2 45.3
 PAT margin (%) 5.1 2.4 5.3 8.3
 Count of Cos. 4,459 4,316 4,300 4,204
Non-financial Companies
 Income -5.5 -9.0 -37.4 -10.3
 Expenses -6.4 -5.0 -37.6 -14.0
 Net profit -13.9 -49.4 -55.7 30.1
 PAT margin (%) 5.7 3.3 4.5 8.1
 Net fixed assets 13.3 6.0
 Current assets 3.0 0.7
 Current liabilities 5.8 -2.9
 Borrowings 15.6 8.1
 Reserves & surplus 1.4 4.5
 Count of Cos. 3,311 3,229 3,220 3,163
Numbers are net of P&E
Updated on: 05 Dec 2020 3:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.4 13.4 0.3
 Expenses 9.9 13.7 0.9
 Net profit -40.6 22.1 -19.9
 PAT margin (%) 2.0 2.3 4.1
 Assets 10.9 9.5 9.3
 Net worth 7.5 8.6 5.0
 RONW (%) 3.4 4.2 5.9
 Count of Cos. 28,469 27,687 7,454
Non-financial Companies
 Income 8.6 14.0 -2.8
 Expenses 8.8 14.1 -1.7
 Net profit -9.2 23.2 -28.6
 PAT margin (%) 2.7 3.1 4.3
 Net fixed assets 7.2 5.5 13.0
 Net worth 6.1 8.4 1.9
 RONW (%) 5.6 6.8 7.3
 Debt / Equity (times) 1.0 1.0 0.8
 Interest cover (times) 2.1 2.4 2.8
 Net working capital cycle (days) 77 70 58
 Count of Cos. 23,112 22,440 5,526
Numbers are net of P&E
Updated on: 05 Dec 2020 2:43PM