Indian economy to see record contraction in FY21 before sharp recovery: S&P

 The Indian economy will experience a record contraction in the fiscal year to March 2021 on account of the global Covid-19 pandemic but real GDP will recover significantly in FY22, rating agency Standard and Poor's said on Friday.

S&P affirmed its rating on India's long-term foreign and local currency sovereign credit at the lowest investment-grade level and retained its stable outlook on the economy.

India's long-term rating was affirmed at 'BBB-' with a stable outlook while the short-term rating was held at 'A-3'.

"The stable outlook reflects our expectation that India's economy will recover following the resolution of the Covid-19 pandemic, and that the country's strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months," S&P said.

India has the second highest virus cases globally despite seeing one of the strictest of lockdowns and cases are still rising as the economy gradually opens up.

"We expect economic activity in India to begin to normalize in fiscal 2022, resulting in real GDP growth of about 10%."

The Indian government's direct fiscal support has been limited to 1.2% of GDP so far compared to roughly 3% of GDP on average in other emerging market economies.

S&P noted that the government's reluctance to provide greater direct fiscal support to the economy likely reflects pre-existing fiscal constraints owing to years of high fiscal deficits.

"Although additional stimulus may help to avert a steeper downturn this year, it would also further strain the government's weak finances," it said.

"This increasingly tenuous balance may challenge India's capacity to maintain sustainable public finances and balanced economic growth, if the recovery is slower than we anticipate."

The country's fiscal deficit is likely to rise to about 12.5% of GDP this year, largely driven by much weaker revenue generation and the government's net indebtedness is set to exceed 90% of GDP this year compared to just over 70% in fiscal 2020, S&P said.

India's factory output contraction eases to 10.4% in July: IIP data

 The Index of Industrial Production (IIP) contracted by 10.4% in July as compared to a contraction of 16.6% in June as the GDP witnessed a historic contraction of nearly 24 per cent in Q1FY21. While the GDP witnessed a slowdown, the industrial activity is slowly picking up as the country enters Unlock 4.0 despite the surging coronavirus cases.

Rating agency ICRA had expected a single-digit contraction in the upcoming print for the Index of Industrial Production for July 2020. According to the rating agency, while the improvement in the industry had gathered speed in July 2020, the momentum of the recovery in the services sector stalled that month.

Other indicators, GST e-way bills, rail freight, port cargo traffic, domestic airlines' passenger traffic, and the consumption of petrol and ATF, reported only a modest improvement in their YoY performance in July 2020, relative to June 2020.

As per the agency, government expenditure, a key driver of economic activity in Q1FY21, reported a volatile trend in July 2020.

It pointed out that revenue expenditure growth slipped from 40.1 per cent in June 2020 to 18.6 per cent in July 2020, while remaining substantial. However, capital expenditure contracted by 47.1 per cent in July 2020 after having more than doubled in June 2020.

Earlier, the IIP had contracted by 16.6 per cent in June compared to 33.8 per cent in May and a record 57.6 per cent slide in April.

After releasing only the index numbers for the IIP, the government had in August announced that the total data for June but cautioned that comparing the IIP in the pandemic months with those preceding Covid-19 would not be appropriate.

On traditional year-on-year, all the components of the IIP — mining, manufacturing, and electricity — saw contraction, albeit by a smaller magnitude, than in the previous month. All but two of the 23 sub-sectors within manufacturing posted a year-on-year contraction. Buoyed by drug exports and orders for sanitisers and protective gear, pharmaceutical production rang up a 34 per cent rise, hugely bettering its 2.45 per cent growth in the previous month.

India GDP growth slows to 3.1% in Q4 as Covid-19 lockdown hits economy

Amid a recessionary outlook for the current fiscal year, economic growth fell to 3.1 per cent — a low not seen in more than 17 years — in the fourth quarter of 2019-20, with private investment and manufacturing hit hard even as there was the Covid-19 lockdown for only few days in March.
This pulled down gross domestic product (GDP) growth to an 11-year low of 4.2 per cent in 2019-20. This was lower than the government projection of 5 per cent in both first and second advance estimates.
Growth had stood at 6.1 per cent in the previous year. Growth in the January-March quarter slumped against the National Statistical Organisation’s (NSO’s) advance estimate of 4.7 per cent. It came down because of a contraction in the manufacturing and construction sectors.
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China, with which India is in competition to be the fastest-growing large economy, saw its economy shrinking by 6.8 per cent in January-March 2020.
However, if the entire 2019 is taken into account, the Chinese economy grew 6.1 per cent.
chartFormer chief statistician Pronab Sen has projected a 10.8 per cent contraction in GDP in the current financial year if no more stimulus is given.
He expects a decline in GDP in the first three quarters with a slight recovery in Q4.
Aditi Nayar, principal economist, ICRA Ratings, said the further extension of the lockdown, though with graded relaxations, and the expectation of substantial delays in getting the full supply chain operational would further dampen economic activity.
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“We expect Indian GDP (at constant 2011-12 prices) to contract by 25.0 per cent and 2.1 per cent, respectively, in Q1 FY21 and Q2 FY21, which implies that a recession is underway. Subsequently, we anticipate muted GDP growth of 2.1 per cent and 5.0 per cent, respectively, in Q3 FY21 and Q4 FY21, which still entails a full year contraction of 5.0 per cent in FY21,” said Nayar.
chartManufacturing contracted 1.4 per cent in Q4 against a 0.8 per cent fall in Q3.
It was the third straight quarter of decline in manufacturing gross value added. It expanded by a statistically insignificant 0.03 per cent in 2019-20 compared with 5.7 per cent in the previous fiscal year.
Agriculture was the only bright spot in the GDP data. It grew by 5.9 per cent in Q4 against 3.6 per cent in Q3. For a year as a whole, it grew by 4 per cent against 2.4 per cent a year ago. Construction saw a contraction of 2.2 per cent in the fourth quarter against fall of 0.04 per cent in Q3. For FY20, the growth rate here fell to 1.3 cent from 6.1 per cent in the previous year. The current quarter would see the impact of lockdown and in the next one the monsoon will dampen construction further.
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Hit hard by the crisis in non-banking financial companies, growth in the biggest segment of the Indian economy — financial services, real estate, and others — declined to 2.4 per cent in the fourth quarter against 3.3 per cent in the previous quarter. Growth in this sector moved down to 4.6 per cent in FY20 against 6.8 per cent a year ago. Another services area — trade, hotels, communication and transport — was dampened primarily by the hospitality segment.
The segment saw growth coming down to 2.6 per cent in Q4 against 4.3 per cent in the third quarter. The growth rate in the segment more than halved to 3.6 per cent in FY20 against 7.7 per cent a year ago.
Investment, seen from gross fixed capital formation (GFCF), declined for the third straight quarter by 6.4 per cent in Q4. It contracted 2.8 per cent in 2019-20, in contrast to a 9.8 per cent expansion in the previous fiscal year. The share of investment in GDP fell to 26.9 per cent in FY20 from 27.5 per cent, given in the government’s second advance estimates.
The government had last year cut the corporation tax rate to 25 per cent to promote private investment. However, not many availed of the option because they would have had to forgo their minimum alternate tax credits.
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It is government spending that appears to have kept the economy afloat, with government final consumption expenditure growing by 13.6 per cent in the fourth quarter, almost at the same rate of 13.4 per cent in Q3. It rose by 11.8 per cent in 2019-20 as against 10.1 per cent in the previous fiscal year. Domestic demand, denoted by the private final consumption expenditure, on the other hand grew by just 2.7 per cent in Q4 against 6.6 per cent in the previous quarter. It rose 5.3 per cent in FY20 against 7.4 per cent in the previous financial year.
The RBI last week said India’s GDP growth will be in negative territory in 2020-21. The Rs 20.97-trillion Covid-19 package does not appear enough to revive the economy with the fiscal impact of the additional stimulus only about 1 per cent of GDP against the claim of 10 per cent. The figures may be revised because the NSO said the data flow had been affected by the pandemic and lockdown.

Tax-burden on India's GDP to rise further, hitting consumption and savings

The latest increase in indirect taxes on commodities like diesel, petrol and alcohol by the central and various state governments is likely to lead to a further rise in the tax burden on India's Gross Domestic Product (GDP). In FY19, indirect taxes (net of subsidies) accounted for nearly 10 per cent of GDP, up from 9.3 per cent a year ago and a low of 6.1 per cent in FY10. This, say economists, will negatively impact household disposable income and may hit consumer demand and savings and investments by the household.
According to the Organisation of Economic Co-operation and Development (OECD), disposable income is closest to the concept of income as generally understood in economics. It measures the income of households (wages and salaries, self-employed income, income from unincorporated enterprises, social benefits, etc.), after taking into account net interest and dividends received and the payment of taxes and social contributions.
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"Disposable income is the portion of GDP that accrues to households that they consume, save or invest. If it grows slower than the overall GDP or declines, households will either cut back on consumption, or savings & investments, or both," says Devendra Pant, head economist India Ratings.
According to various estimates central government can earn up Rs 1.7 trillion in additional tax revenues from diesel and petrol in FY12 besides additional revenue mop-up by state governments.
Against this, India’s GDP is expected to either decline marginally or stay stagnant according to various estimates depending on the extent of the Covid-19 lockdown.
In the last five-years, indirect taxes such as excise, customs and Goods & Service tax net of subsidies has grown at a much faster pace than the growth the country's Gross Domestic Product (GDP). The trend is similar in case of direct taxes such as personal income tax and corporate income tax.
For example, in the last five-years net indirect tax grew at compounded annual growth rate (CAGR) of 16 per cent growing from Rs 8.7 trillion in FY4 to around Rs 19 trillion in FY19. Direct Taxes during the period grew at a CAGR of 13.1 per cent from Rs 6.5 trillion in FY14 to Rs 13.5 trillion in FY19 according to figures from Reserve Bank of India.

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A faster rise in tax burden led to a steady decline the portion of gross domestic product that accrues to the household. Household disposable income was equivalent to around 85 per cent of GDP in FY19 down from 85.5 per cent a year ago and a high of 90 per cent in FY09.
In the same period, India gross domestic product at current prices grew at a CAGR of 11 per cent while private final consumption expenditure grew at a CAGR of 11.7 per cent while household savings grew at a CAGR of 8.6 per cent.
“In general household held-up the consumption by cutting back of savings and increase in borrowings that showed-up in a boom in retail credit in the economy,” says Dhananjay Sinha, head research Systematix Group.
Others fear that such a high taxation on transport fuel will raise logistics costs for firms hurting the competitiveness of the manufacturing sector in the country. “Diesel prices – the key transport fuel – in India are one the highest in the word which make goods transport very expensive. How will an Indian manufacturer be globally competitive if energy costs are 3-4X that of competition?” asks Amit Bhandari, fellow, fellow, Energy and Environment Studies, Gateway House.

India's fiscal deficit may shoot to 6.2% of GDP in FY21: Fitch Solutions

India's fiscal deficit in 2020-21 may shoot up to 6.2 per cent of the GDP from 3.5 per cent government estimate as a fallout of the Covid-19 economic stimulus package, Fitch Solutions said on Wednesday.
With businesses disrupted due to the lockdown and its ripple effects, revenue will come under "heavy pressure" and may force the government to look towards additional borrowing and/or a higher central bank dividend to fund its expenditure, it said.
"At Fitch Solutions, we are revising our forecast for India's FY2020/21 (AprilMarch) central government fiscal deficit to widen to 6.2 per cent of GDP, from 3.8 per cent of GDP previously (estimated by Fitch Solutions), which reflects our view that the government will miss its initial target of 3.5 per cent by a wider margin," the agency said.
Underpinning the revised forecast are weaker revenue collection as a result of a sharp virus-driven downturn in economic activity and higher expenditures aimed at softening Covid-19's economic shock.
Stating that weak economic activity will likely see revenue collection contract in 2020-21, Fitch Solutions said receipts may contract by 1 per cent from a growth of 11.8 per cent previously.
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"We have revised our FY2020/21 real GDP growth forecast to 4.6 per cent, from 5.4 per cent previously, to reflect our view for growth to weaken further from our estimate of 4.9 per cent in FY2019/20 due to both economic disruptions due to domestic movement restrictions and weak global demand," it said.
The government declared a 21-day nationwide lockdown beginning March 25. "The rushed implementation of the lockdown which gave its citizens only a few hours to prepare has reportedly caused many rural migrants in the cities to be left without food and shelter, prompting them to return to their villages, either on the last remaining carriers or on foot."
The mass migration of such workers raises a significant risk of a larger Covid-19 outbreak across the country, it said, adding the rural areas reportedly have fewer coronavirus cases versus the cities as of end-March and the perceived safety of the rural areas has given another reason for the migrant workers to return home.
"As such, we see virus-led economic disruptions extending for several quarters, which will weigh heavily on personal and corporate income tax collections for the year," it said.

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At the same time, expenditures are expected to surge as the government responds to the Covid-19 crisis both on an economic and social front over 2020-21.
"We forecast expenditures to rise by 22.2 per cent despite lower revenue collection," it said. "Faced with a humanitarian crisis brought about by the Covid-19 pandemic, we believe that the central government will have no choice but to increase their spending, over and above what they have planned for in 2020-21 Union Budget and the Rs 1.7 trillion (0.8 per cent of GDP) fiscal stimulus package it released on March 26."
The package included cash handouts, free food for the poor, medical insurance for medical staff, and a temporary regulatory amendment for employees of small companies to dip into their pension fund to fund their expenditures in the meantime.
Fitch Solutions said the Rs 1.7 trillion fiscal stimulus is "inadequate to provide support the economy of India's size amid a likely global recession".
"In contrast, countries such as Singapore and the US have already announced stimulus packages worth 11 per cent and 10 per cent of GDP, respectively, and still are prepared to do more if necessary," it said.
"As such, we expect additional stimulus packages to be announced by the Indian central government over the coming months, and have accordingly factored this into our deficit forecast revision.
Hurdles in fighting coronavirus are lack of funds, healthcare infra: Fitch
Continued lack of medical funds and healthcare infrastructure despite additional funding poses challenges in mounting an effective response against the coronavirus outbreak, according to a report.
"The continued lack of medical funding and healthcare infrastructure inform our view for the potential epidemic to be worse in India if it is not adequately contained. With 8.5 hospital beds per 10,000 population and 8.0 physicians per 10,000, the country's healthcare sector is not equipped for such a crisis," Fitch Solutions said.
Moreover, the significant inefficiency, dysfunctioning, and acute shortage of the healthcare delivery systems in the public sector appear to be insufficient to match up with the growing needs of the population, it said.
Fitch Solutions noted that more than 80 per cent of the population still does not have any significant health insurance coverage and approximately 68 per cent of the Indian population has limited or no access to essential medicines.
"In addition, over the last two decades, the availability of free medicines in public healthcare facilities has declined from 31.2 per centto 8.9 per cent for inpatient care and from 17.8 per cent to 5.9 per cent for outpatient care, according to a Public Health Foundation of India study," it said.

MARKET LIVE: Sensex off highs as RBI says FY20 GDP growth of 5% now at risk

Indian equity markets climbed off the day's higher after the RBI Governor Shaktikanta Das said that India's FY20 GDP growth forecast of 5 per cent was now at risk. The RBI's Monetary Policy Commitee (MPC) reduced the policy repo rate by 75 basis points to 4.4 per cent to help arrest the economic slowdown in the wake of the coronavirus (Covid-19) outbreak. READ MORE
The S&P BSE Sensex was up 363 points, or 1.2 per cent at 30,300 levels and the Nifty50 index slipped below the 9,000-mark, up 192 points, or 2.25 per cent.
In the broader market, the S&P BSE MidCap index and SmallCap index were both up 2 per cent each.
GLOBAL MARKETS
In the US, Wall Street rallied overnight despite a record number of new unemployment filings in the United States, as traders focused on the unanimous passage of a $2 trillion coronavirus relief bill in the U.S. Senate. The Dow Jones and the S&P 500 surged over 6 per cent each and the Nasdaq Composite climbed 5.6 per cent.
Asian stocks also rose on Friday. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1 per cent. Australian shares were up 2 per cent, while Japan’s Nikkei stock index rose 3.65 per cent.
In commodities, oil fell as fears of plunging demand outweighed expectations of support from the US stimulus. Brent fell 2.26 per cent to $26.77 a barrel.
(with inputs from Reuters)
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Fundamentals of Indian economy strong, has capacity to bounce back: PM Modi

Unfazed by projections of GDPgrowth slowing to an 11-year low in the current fiscal, Prime Minister Narendra Modi on Thursday said fundamentals of the Indian economy are strong and it has the capacity to bounce back.
Modi, who seems to have taken charge of the efforts to revive the economy, has over the past few days held as many as 12 brainstorming meetings with different stakeholders over various issues affecting the economy and to thrash out appropriate policy interventions in the upcoming Budget.

On Thursday, he met economists, private equity and venture capitalists, business leaders and agri experts at Niti Aayog and called for focussed efforts from all stakeholders to achieve the target of nearly doubling the size of the Indian economy to USD 5 trillion by 2024.
"We must all work together and start to think like a nation," an official press statement quoted him as saying at the meeting.
Modi has been devoting a considerable amount of time in personally overseeing the policy matrix aimed at engineering a quick turnaround of the Indian economy, which is estimated to grow at 5 per cent in 2019-20, significantly lower than 6.8 per cent growth rate last fiscal and the lowest pace of GDP growth for a full financial year since the global financial crisis in 2008-09.
At the pre-Budget meeting at Niti Aayog, Modi called for a focussed effort from all stakeholders in order to achieve the target of USD 5 trillion economy, the statement said.
The prime minister said he was happy that the two-hour open discussion has brought to the forefront the experience of people on the ground and those working in their respective fields.
This, he said, would enhance the synergy between policymakers and various stakeholders.
The idea of $5 trillion economy is not a sudden development and is based on a deep understanding of the strengths of the country.
"The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back," he said adding sectors like tourism, urban development, infrastructure, and agri-based industry have a great potential to taking forward the economy and for employment generation.
He said open discussions and brainstorming in such forums lead to a healthy debate and understanding of the issues.
This would also foster a positive mood and "can do" spirit in the society, he said.
According to sources, the participants urged the government to focus on credit expansion, exports growth, governance of Public Sector Banks (PSBs), increasing consumption and job creation. As many as 40 experts and economists attended the meeting.
Modi assured them that he would act on suggestions that can be implemented in the short-term and also consider long-term suggestions in due course as these require structural reforms.
In a tweet, Niti Aayog Vice Chairman Rajiv Kumar said the meeting "discussed a wide range of issues relating to economic growth, startups & innovation."
The high-profile meeting was attended by Home Minister Amit Shah, Road Transport and Highways Minister Nitin Gadkari, Commerce and Industry Minister Piyush Goyal besides Niti Aayog Vice Chairman Rajiv Kumar, CEO Amitabh Kant and other senior officials of the think-tank.
Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, too was present at the meeting.
Finance Minister Nirmala Sitharaman was not present, as she was holding pre-Budget meetings with party workers at BJP headquarters.
The Niti Aayog meeting assumes significance as the government is in the process of formulating Budget proposals for 2020-21. The government's focus will be on accelerating economic growth, which is estimated to slip to an 11-year low of 5 per cent during 2019-20.
The prime minister on Monday interacted with top business tycoons to discuss the issues facing the economy and measures needed to boost growth and create jobs.
Among others, the Niti Aayog meeting was attended by NIPFP economist Ila Patnaik, former chief economic advisor Shankar Acharya, IGIDR Professor R Nagraj, KKR India CEO Sanjay Nayar, Ather Energy Co-founder and CEO Tarun Mehta, MakeMyTrip CEO Deep Kalra, Dabur India chief Mohit Malhotra, Bandhan Bank MD and CEO Chandra Shekhar Ghosh and CRISIL MD and CEO Ashu Suyash.
Sitharaman will be presenting her second Union Budget on February 1.
A key factor driving the sharp slowdown in Indian economy is the manufacturing sector slump.
In response to the slowdown, the Reserve Bank has eased policy rates significantly during 2019, with a series of rate cuts since February 2019, while the government announced a large reduction in corporate tax rates in September in order to help boost new investment spending.
The February 1 Budget is widely expected to unveil more measures to boost growth.

CAD narrows to 0.9% of GDP in July-Sept on lower trade deficit: RBI

India's current account deficit (CAD) narrowed to 0.9 per cent of GDP, or $6.3 billion, in the September 2019 quarter, on account of lower trade deficit.
It had stood at 2.9 per cent of gross domestic product (GDP), or $19 billion, in the corresponding quarter of 2018-19.

On a sequential basis, CAD had printed 2 per cent of GDP, or $14.2 billion, in the June 2019 quarter.
The current account deficit is the difference between foreign exchange inflows and outflows.
"The contraction in the CAD was primarily on account of a lower trade deficit at $38.1 billion as compared with $50 billion a year ago," the Reserve Bank of India (RBI) said in a release on Tuesday.
During the first half of the current financial year, CAD narrowed to 1.5 per cent of GDP from 2.6 per cent in the corresponding period in 2018-19, on the back of a reduction in the trade deficit, which shrank to $84.3 billion as compared with $95.8 billion a year ago.
The trade deficit is the gap between the value of imports and exports.
The balance of payment stood at $5.12 billion in the second quarter and $19.10 billion during the first half of this fiscal.
Net foreign direct investment stood at $7.4 billion, almost the same level as in second quarter of 2018-19.
Helped by net purchases in the debt market, foreign portfolio investment recorded a net inflow of $2.5 billion in the September 2019 quarter, against an outflow of $1.6 billion a year ago.
In the April-September 2019 period, while the net FDI inflows were at $21.2 billion, portfolio investment recorded a net inflow of $7.3 billion.
Net services receipts increased 0.9 per cent on in July-September on a y-o-y basis, on the back of a rise in net earnings from computer, travel and financial services, the RBI said.
In the second quarter of 2019-20, private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $21.9 billion, an increase of 5.2 per cent as against a year ago.
The net inflow on account of external commercial borrowings to the country was $3.2 billion in the second quarter as compared with $2 billion in corresponding period of the previous financial year.
There was a growth of $5.1 billion in the foreign exchange reserves in the September 2019 quarter, compared with a depletion of $1.9 billion a year ago.
During the first half of 2019-20, there was an accretion of $19.1 billion of the foreign exchange reserves, the RBI said.

IMF raises questions over methodology to calculate GDP growth in India

The International Monetary Fund (IMF) has raised questions over some part of the methodology to calculate gross domestic product (GDP) numbers in India. It said large revisions to historical series, the relatively short time span of the revised series, and major discrepancies between GDP by activity and GDP by expenditure complicate analysis.
There was a major controversy over the back series data on the base year of 2011-12. A committee set up by the National Statistical Commission (NSC) came out with its recommendations on the back series, which showed double-digit growth in some years of the UPA government. The recommendations were junked by the government after those were put on the public domain.
Later, the Ministry of Statistics and Programme Implementation (MoSPI) came out with its own back series data on the base year of 2011-12.
It varied hugely from the numbers given by the NSC panel, inviting criticism from many quarters.
IMF also said there were weaknesses in the deflation method used to derive value added. Deflators are used to convert GDP at current prices to constant prices.
IMF said the compilation of constant price GDP deviate from the conceptual requirements of the national accounts, in part due to the use of the Wholesale Price Index (WPI) as a deflator for many economic activities. “The appropriate price to deflate GDP by type of activity is the Producer Price Index (PPI), which is under development,” IMF said.
IMF OBSERVATIONS
Major discrepancies between GDP by activity and GDP by expenditure complicate analysis
There are weaknesses in the deflation method used to derive value added
The compilation of constant price GDP deviates from the conceptual requirements of the national accounts, in part due to the use of the WPI as a deflator for several activities
Former chief statistician Pronab Sen said: “We know the weakness of the WPI series to be used as deflator.” Many countries use PPI as deflator as it captures services as well. However, Sen explained that services, particularly those provided by professionals, cannot be so easily priced uniformly even by PPI.
For instance, medical services provided by a doctor would be priced differently from the ones by another doctor. These discrepancies on prices are there even in advanced countries’ GDP computation, which IMF conveniently glosses over, Sen said.
Many have raised the issue of the correctness of the methodology of computing GDP on the new base year of 2011-12. For instance, former chief economic advisor Arvind Subramanian had found that the GDP growth rate has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17 due to a change in methodology for calculating GDP.

GDP and IIP gap may widen to over 900 bps in third quarter, says Moody's

The link between the country’s headline economic growth and pace of industrial production continues to weaken.
In fact, the gap between the two macro variables is likely to reach its highest level since the 2008 Lehman Brothers crisis if the gross domestic product (GDP) estimates for Q3FY20 and latest trend in the Index of Industrial Production (IIP) are any indicator.

India’s headline GDP is expected to grow by 5.5 per cent during the third quarter, according to estimates by rating agency Moody’s while IIP contracted by 3.8 per cent during October 2019, the first month of the third quarter.
This suggests that the growth in GDP at constant prices is nearly 900-basis-point higher than the industrial expansion as captured by the IIP.
IIP is calculated on monthly basis while GDP numbers are available on quarterly basis India’s headline GDP was up 4.5 per cent during the second quarter of FY20 against a contraction of 0.3 per cent in IIP during Q2FY20 and a decline of 3.8 per cent during October 2019.
According to data by the Central Statistical Organisation (CSO), IIP has now contracted for three consecutive months for the first time since June 2012. Such a divergent trend in the headline GDP and pace of industrial production is rare, and historically, both move together.
A large gap in the headline economic growth and the pace of IIP was last witnessed during the June 2015 quarter. In the last two decades, quarterly GDP growth has exceeded IIP growth by 900 basis points or more only once (on a quarterly basis). This was during the July-September 2009 quarter after the global financial crisis (see chart).
Analysts said the contraction in IIP could make it difficult for the manufacturing sector to provide a lift to the overall GDP during the second half of FY20.
charts“The recent decline in IIP is largely a reflection of pain in the manufacturing and industrial sector. This will put a downward pressure on overall GDP growth unless the government expands public spending, which incidentally was the largest contributor to economic growth during the July-September 2019 quarter,” said Dhananjay Sinha, chief economist and head strategist, IDFC Securities.
For others, such a large divergence is a sign of an element of growth over estimation in the calculation of GDP.
“If you juxtapose the recent trend in industrial production and retail or consumer inflation with GDP growth at nominal or current prices, growth estimation could be as high as 400 basis points,” said an economist on condition of anonymity. One basis point is one-hundredth of a per cent.
According to him, GDP is first calculated on nominal or at current prices and we subtract price deflator or inflation from it to get GDP at constant prices, which becomes the headline growth figure. For example, nominal GDP was estimated to be 6 per cent during Q2FY20 while price deflator was assumed to be 1.5 per cent, giving a real GDP growth of 4.5 per cent.
GDP deflator is, however, way lower than the retail inflation of around 4.5 per cent during Q2FY20 on average and nearly 5.5 per cent now.
“We assume GDP deflator to be around 4.9 per cent, giving a real GDP growth of 1.1 per cent. So, in our model, GDP was over estimated by around 340 basis points in Q2FY20,” added the economist.

GDP growth slows to 4.5% in Q2 as manufacturing, services disappoint

The economy posted its weakest growth in more than six years as manufacturing activity contracted by 1 per cent in the September quarter. Gross domestic product (GDP) rose 4.5 per cent from a year ago, down from 5 per cent in the previous quarter, the data released by the National Statistical Office on Friday showed.
Two successive quarters of below 5 per cent growth have cast a shadow on the economy’s performance in the fiscal year, analysts said.
Worse, nominal GDP growth slipped to 6.1 per cent, the lowest in nearly two decades. Growth in government revenues and middle-class salaries is largely in line with nominal GDP growth.
Growth in investment (gross fixed capital formation), at a mere 1 per cent, was the slowest since the December 2014 quarter. Though tax cuts for companies would help in reviving investment, the investment rate in Q2 stood at 27.6 per cent, the lowest in 11 quarters.
GDP growth slows to 4.5% in Q2 as manufacturing, services disappointFormer prime minister Manmohan Singh expressed concern over the economic situation. “This is clearly unexpected and the aspirations of the people are that the country grows at 8-9 per cent per annum,” he said at an event here.
Agriculture grew at 2.1 per cent, refusing to go up much despite monsoon recovery in September. But nominal growth in the farm sector stayed above 7 per cent. This gives a grim picture of sectors other than agriculture, said Pronab Sen, former chief statistician of India.
“While farm prices were inflationary, non-farm sectors suffered a severe setback in terms of price realisation. The real cost of borrowing has gone up, while the debt-servicing ability has declined across sectors,” he told Business Standard.
Nominal GDP growth is now below the rate at which the government borrows to finance its deficit, at 6.5 per cent. This is quite a serious blow to the economy, experts said.

GDP growth slows to 4.5% in Q2 as manufacturing, services disappoint
“This would mean that the government’s debt-to-GDP ratio will rise now. More importantly, the economy growing slower than the borrowing rate would act as a disincentive to potential investors,” Arjun Jayadev, professor of economics at Azim Premji University, told Business Standard.
Even as the services sector propped up the growth number, its growth at 6.7 per cent was the lowest since March 2014 (excluding construction).
But spending by the government, facilitated by the rollout of funds after the Union Budget was presented on July 5, helped growth. Government consumption expenditure grew by 15.6 per cent.
Private consumer spending (by households and businesses) grew 5 per cent year-on-year, improving slightly from the previous quarter.
Experts said though a rate cut in the upcoming monetary policy meeting seemed a certainty now, green shoots were hard to find, and they worry further growth spiralling down could not be ruled out unless there is a boost from the fiscal side.
“The slowdown has deepened and is now expected to remain more extended than previously anticipated. Optimism levels of businesses and consumers have fallen,” said Arun Singh, lead economist at Dun and Bradstreet India.
Several economists echoed this view.
“The data shows that the economy is passing through a declining growth momentum and there is no easy way out. The current domestic and global macro environment and the government will have to do some heavy lifting to support growth,” said Sunil Kumar Sinha, India Ratings.
While corporate tax cuts would dent government revenues, enhanced divestment and dividends from state-owned enterprises could help the government — to some extent — to boost public spending.
Construction too failed to pick up pace, growing just 3.3 per cent in Q2.

India's Q2 GDP growth dips to over 6-yr low of 4.5%; manufacturing weighs

India's GDPgrowth hit an over six-year low of 4.5 per cent in July-September 2019, dragged mainly by deceleration in manufacturing output and subdued farm sector activity, according to official data released on Friday.
The Gross Domestic Product (GDP) growth was recorded at 7 per cent in the corresponding quarter of FY 2018-19. In the previous quarter of the ongoing fiscal, the economic growth was 5 per cent.

This GDP growth data for the September 2019 quarter is the lowest since January-March of 2012-13, when it was registered at 4.3 per cent.
According to the data released by National Statistical Office (NSO), the gross value added (GVA) growth in the manufacturing sector contracted by 1 per cent in the second quarter of this fiscal from 6.9 per cent expansion a year ago.
Similarly, farm sector GVA growth remained subdued at 2.1 per cent, down from 4.9 per cent in the corresponding period of the previous fiscal.
Construction sector GVA growth too slowed to 3.3 per cent from 8.5 per cent earlier. Mining sector growth was recorded at 0.1 per cent as against 2.2 per cent contraction a year ago.
Electricity, gas, water supply and other utility services growth also slowed to 3.6 per cent from 8.7 per cent a year ago. Similarly, trade, hotel, transport, communication and services related to broadcasting growth was also down to 4.8 per cent in the second quarter from 6.9 per cent a year ago.
Financial, real estate and professional services growth slowed to 5.8 per cent in the Q2 FY2019-20 from 7 per cent a year ago.
On the other hand, public administration, defence and other services reported improvement with an 11.6 per cent rise during the quarter under review from 8.6 per cent a year earlier.
On a half-yearly basis (April-September 2019), GDP growth came in at 4.8 per cent as compared to 7.5 per cent in the same period a year ago.
"GDP at constant (2011-12) prices in Q2 of 2019-20 is estimated at Rs 35.99 lakh crore, as against Rs 34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent," an NSO statement said.
Gross Fixed Capital Formation (GFCF), which is barometer of investment, at constant (2011-2012) prices, estimated at Rs 10.83 lakh crore in Q2 of 2019-20 as against Rs 11.16 lakh crore in Q2 of 2018-19.
In terms of GDP, the rates of GFCF at Current and Constant (2011-2012) prices during Q2 of 2019-20 are estimated at 27.3 per cent and 30.1 per cent, respectively, as against the corresponding rates of 29.2 per cent and 32.4 per cent, respectively in Q2 of 2018-19.
"Growth rates of GFCF at Current and Constant Prices are estimated at (-) 0.9 percent and (-) 3.0 percent during Q2 of 2019-20 as compared to 16.2 percent and 11.8 percent during Q2 of 2018-19," it added.
The Reserve Bank had lowered the GDP growth projection for 2019-20 to 6.1 per cent from earlier forecast of 6.9 per cent.
China's economic growth was 6 per cent in July-September 2019, which was the weakest expansion in over 27 years.
Earlier in the day, the government data showed that output of eight core infrastructure industries contracted by 5.8 per cent in October, indicating the severity of economic slowdown As many as six of eight core industries saw a contraction in output in October.

MARKET WRAP: Indices gain for 6th straight day, Sensex ends 246 pts higher

Extending their gaining streak into the sixth straight session, benchmark indices ended with over half a per cent gains on Friday even as global peers tumbled after China's GDP growth slipped to a 27-year low of 6 per cent.
Industry heavyweights Reliance Industries (RIL), HDFC Bank, TCS, and Larsen & Toubro (L&T) helped benchmark S&P BSE Sensex settle at 39,298 levels, up 246 points or 0.63 per cent. The 30-share index hit an intra-day and low of 39,361 and 38,964, respectively.
YES Bank (up over 8 per cent) emerged as the top gainer on the index while Tata Motors (down 1 per cent) the biggest loser.
In the broader market, both mid and small-caps outperformed the headline indices. The S&P BSE MidCap index added 253 points or 1.78 per cent to close at 14,420 while the S&P BSE SmallCap index ended at 13,127, up 213 points or 1.65 per cent.
On the NSE, the broader Nifty50 index gained 75.50 points or 0.65 per cent to close at 11,662 levels.
On a weekly basis, both Sensex and Nifty ended with 3 per cent gains.
On the sectoral front, barring Nifty IT, all the other indices ended in the green. Relaty stocks advanced the most, followed by metal and PSU bank stocks. The Nifty Realty index climbed nearly 2 per cent to 262.80 levels.
BUZZING STOCKS
Reliance Industries (RIL), the oil-to-telecom behemoth, on Friday hit another milestone as the market capitalisation (m-cap) of the company breached the coveted Rs 9 trillion-mark, the first by any Indian company. The stock hit a high of Rs 1,428 during the session. At the time of writing of this report, the m-cap of the company stood at Rs 9,00,507 crore. At close, the stock stood at Rs
1,415 apiece on the BSE, up over 1 per cent. The m-cap of the company was 8,97,179.47 crore. READ MORE
Shares of Bharat Heavy Electricals (BHEL) surged 27 per cent to Rs 56.45 on the National Stock Exchange (NSE) in the intra-day deals on Friday amid reports the government may look to reduce stake in the company. The stock recorded its sharpest intra-day rally in more than a decade. The stock ended at Rs 54, up 22.22 per cent. READ MORE
GLOBAL MARKETS
Asian stocks stumbled on Friday, erasing earlier gains after China posted its weakest growth in nearly three decades, countering a global lift in sentiment on the UK and European Union striking a long-awaited Brexit deal. MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.3 per cent, erasing earlier small gains. Australian shares dropped 0.52 per cent and Chinese blue-chips were off 1.53 per cent. Japan's Nikkei ended 0.18 per cent higher.
In commodities, oil prices slid as China's slowest GDP growth in almost three decades stoked demand fears.
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03:43 PM
RIL, HUL, Bajaj Finance, Nestle hit record high
Shares of Reliance Industries (RIL), Hindustan Unilever (HUL), Bajaj Finance and Nestle India from the Nifty 50 index hit their respective all-time high on the National Stock Exchange (NSE) in intra-day deal on Friday.

Avenue Supermarts, which runs the DMart chain of stores, Adani Green Energy, Berger Paints, Blue Star, Indraprastha Gas, Manappuram Finance, SBI Life Insurance, Siemens and Whirlpool of India among total 16 stocks from the Nifty 500 index that also reached their record high in intra-day trade today READ MORE
03:41 PM
Market roundup
Indian equities outperformed major global markets during the week. The BSE-30 Index gained 3.1% in the past week. Equity markets witnessed a sharp rally on FII buying, progress in US-China trade talks and as well as a deal being reached between UK and EU on Brexit. Infosys and Power Grid were the top losers in the BSE-30 Index, while Tata Motors, Yes Bank and ONGC were the top gainers. CPI inflation rose to 3.99% in September (August: 3.28%), and August IIP growth was at (-)1.1% (July: 4.6%). FPIs bought equities worth US$1.2 bn over the past five trading sessions while DIIs bought US$263 mn worth of equities
-- Sanjeev Zarbade, vice-president for private client group research, Kotak Securities
03:40 PM
Nifty snapshot
03:39 PM
RIL contributes most to Sensex's gains; M-cap hits Rs 9 trillion
03:39 PM
CLOSING BELL
The S&P BSE Sensex added 246 points or 0.63 per cent to end at 39,298 levels while Nifty ended at 11,662, up 76 points or 0.65 per cent.
03:38 PM
YES Bank, Maruti top Sensex gainers
03:37 PM
Index watch
03:21 PM
Ashok Leyland gains over 5%
03:03 PM
BUZZING STOCK | PNB Housing Finance up 15%
02:59 PM
Hard path to growth: How the next 6 months look for India's economy
With the first half of 2019-20 having presented a dismal picture of the Indian economy, speculation is rife on whether the remaining six months would be better or worse. Let us assess the prospects of each of the key sectors of the economy in the second half of 2019-20 — overall economic growth, foreign trade, industrial output and retail inflation. READ MORE
02:51 PM
China's GDP growth grinds to near 30-year low as tariffs hit production
China's economy expanded at its slowest rate in nearly three decades in the third quarter, hit by cooling domestic demand and a protracted US trade war, official data showed Friday. The Chinese economy grew 6.0 percent in July-September, compared with 6.2 percent in the second quarter, according to the National Bureau of Statistics (NBS). READ MORE
02:46 PM
NEWS ALERT | Aviation Secy likely to chair meet on Air India divestment at 04:30 pm


02:40 PM
BROKERAGE RADAR | Edelweiss Securities on Sheela Foam
Though margin levers exist, adjusting for the muted outlook in the mattress business we revise down FY20E revenue/EBITDA 3/6 per cent. However, adjusting for the lower tax rate, we revise PAT up by 3 per cent. We value the standalone business at 40x September 2020E EPS and subsidiaries at 13x September 2020E EPS with revised target price (TP) of Rs 1,489.
02:36 PM
NEWS ALERT | Indoco’s Clinical Research Organisation receives zero 483s from US FDA: bSE Filing
Alert: The inspection was held from 14th October to 18th October, 2019
02:34 PM
NEWS ALERT | Lupin gets EIR from US FDA for Nagpur facility: BSE Filing
-- EIR indicates closure of inspection
02:33 PM
MARKET CHECK | Top 5 gainers on the BSE
02:19 PM
NEWS ALERT | Zee's escrow arrangement details
-- Identity of buyer, quantum of stake sale will not be revealed to lenders

-- Price at which stake sale is executed, and date and time of stake sale will not be revealed to lenders

-- Stake sale to be done via broker
(As reported by CNBC TV18)
02:17 PM
Buzzing stock | BPCL sees sharp surge
02:09 PM
NEWS ALERT | Zee Entertainment sends escrow arrangement to lenders for next tranche of stake sale: sources to CNBC TV18
-- Escrow arrangement one sided; favours company

-- Co tells lenders that they have ready buyer; Co meeting with lenders currently underway
02:04 PM
FMCG rural growth hits 7-year low; poor consumption pulls down retail sales
Slowing fast-moving consumer goods (FMCG) market got worse during the September quarter (Q2), with volume growth in rural India plunging to a meagre 2 per cent from 16 per cent a year ago. North India, the largest market for FMCG, saw volume growth falling to 1 per cent from 17 per cent as the FMCG volume shrank by 2 per cent the villages. Slowdown in South India, however, plateaued with growth rate matching that of last year. READ MORE
01:56 PM
MOFSL on State Bank of India (SBI)
The macro environment remains challenging with new names being added to the stressed pool. While SBIN has exposure to the stressed names, we believe that given its size, the new stress is manageable (~2% of loans), however, we have conservatively factored in credit cost assumptions of 1.9% /1.3% for FY20/FY21. SBIN’s liability side of the balance sheet is strong with high CASA ratio, which will help manage yield pressure on the asset side due to transition to the new external benchmark regime on floating rate retail & MSME loans. The stock price has corrected 29% over the past three months, which provides favorable risk-reward, in our view. Overall, we expect RoA/RoE to improve to 0.7%/12.7% by FY21 and maintain our target price at INR350 (1.1x FY21E ABV for the bank + INR94 per share for subsidiaries). SBIN remains one of our top Buys in the sector.

01:53 PM
BUZZING STOCK | Oil India up over 3%
01:45 PM
NEWS ALERT | ED files prosecution complaint against ex-Moser Baer executive director Ratul Puri
01:42 PM
MARKET CHECK | S&P BSE PSU advances over 1.50%
01:36 PM
NEWS ALERT | CBI files chargesheet, names Karti Chidambaram, P Chidambaram as accused in INX Media case
01:18 PM
RESULTS IMPACT | Zee Entertainment slips 9% in firm market post Q2 results
Shares of Zee Entertainment Enterprises (ZEEL) slipped 9 per cent to Rs 240 in the intra-day deal on the BSE on Friday after the company reported lower-than-expected consolidated net profit for July-September quarterly (Q2) as it provided for an inter-corporate deposit (ICD) worth Rs 171 crore during the period. READ MORE
01:00 PM
BROKERAGE RADAR | HDFC Securities on Cyient
We maintain NEUTRAL on Cyient post in-line revenue and margin miss in 2QFY20. Growth challenges remain in core verticals and margin recovery is slow. We have lowered EPS estimates by 1.2/1.4 per cent for FY20/21E and our target price (TP) of Rs 485 is based on 11x Sep-21E EPS.
12:50 PM
HDFC Bank Q2 preview: Profit seen 22% higher; growth in retail loans eyed
Analysts at Emkay Global Financial Services believe that despite the bank enjoying the overall benefit of the tax rate cut, its DTA could be hit by Rs 1,200 crore in this quarter. They say that the “benefits of the lower tax rate could get off-set by the mark-down on one-time DTA, leading to a net higher tax outflow”. They peg the net profit at Rs 6,102.6 crore, up 22 per cent YoY, from a profit of Rs 5,005.7 crore logged in Q2 of FY19. Sequentially, the PAT is likely to rise nearly 10 per cent from Rs 5,568.2 crore (Q1FY20). READ PREVIEW HERE

12:42 PM
NEWS ALERT | ARSS Infra bags order worth Rs 76.15 cr in Odisha: BSE Filing
12:33 PM
MARKET CHECK

IMF slashes India's GDP growth projection to 6.1% in 2019

The IMF on Tuesday slashed India's GDP growth projection for the year 2019 to 6.1 per cent, which is 1.2 per cent down from its April projections.
The International Monetary Fund (IMF) in April said India will grow at 7.3 per cent in 2019. However, three months later it projected a slower growth rate for India in 2019, a downward revision of 0.3 per cent.

As against India's real growth rate of 6.8 per cent in 2018, the IMF in its latest World Economic Outlook projected India's growth rate at 6.1 per cent in 2019 and noted that the Indian economy is expected to pick up the next year at 7.0 per cent in 2020.
On Sunday, the World Bank in its latest edition of the South Asia Economic Focus said India's growth rate is projected to fall to 6 per cent in 2019 from 6.9 per cent of 2018.
ALSO READ: World Bank says slowdown in India is severe, cuts GDP forecast to 6%
The downward revision relative to the April 2019 WEO of 1.2 percentage points for 2019 and 0.5 percentage point for 2020 reflects a weaker-than-expected outlook for domestic demand, the IMF said.
"Growth will be supported by the lagged effects of monetary policy easing, a reduction in corporate income tax rates, recent measures to address corporate and environmental regulatory uncertainty, and government programs to support rural consumption, the IMF said.
China, whose GDP grew at 6.6 per cent in 2018, is now projected to grow at 6.1 per cent in 2019 and 5.8 per cent in 2020, it said.
"India's economy decelerated further in the second quarter, held back by sector-specific weaknesses in the automobile sector and real estate as well as lingering uncertainty about the health of nonbank financial companies," said the World Economic Outlook released ahead of the annual meeting of the IMF and the World Bank.
In India, growth softened in 2019 as corporate and environmental regulatory uncertainty, together with concerns about the health of the nonbank financial sector, weighed on demand, it said.
In its report, the IMF said that in India, monetary policy and broad-based structural reforms should be used to address cyclical weakness and strengthen confidence. A credible fiscal consolidation path is needed to bring down India's elevated public debt over the medium term.
This should be supported by subsidy-spending rationalisation and tax-base enhancing measures. Governance of public sector banks and the efficiency of their credit allocation needs strengthening, and the public sector's role in the financial system needs to be reduced, it said.
Reforms to hiring and dismissal regulations would help incentivize job creation and absorb the country's large demographic dividend. Land reforms should also be enhanced to encourage and expedite infrastructure development, the IMF said.

Finance panel won't accept Centre's GDP forecasts, says N K Singh

The Fifteenth Finance Commission (FC) is not obliged to accept nominal gross domestic product (GDP) forecasts given by the central government and will make its own judgement, FC Chairman N K Singh said on Friday. Singh said he would meet state finance ministers at the next Goods and Services Tax (GST) Council meeting on September 20 in Goa.
The topics for discussion will include whether the GST compensation period should be extended by three years to be co-terminus with the 15th FC award period, and whether the 14 per cent revenue growth, on the basis of which states are compensated, needs to be given a fresh look.

Singh was briefing the media after a meeting of the 15th FC with economists who make up its advisory council.
The council’s members who attended the meeting included Chief Economic Adviser Krishnamurthy Subramanian, D K Srivastava, M Govinda Rao, Indira Rajaraman, Sudipto Mundle, Omkar Goswami, Arvind Virmani, Surjit Bhalla, Prachi Mishra, and Neelkanth Mishra. “I cannot be oblivious to what economists told me today (Friday). The Commission is not obliged to accept the numbers on nominal GDP as submitted to the Commission either in the Centre’s memorandum or as contained in the medium-term fiscal policy statement presented to Parliament,” Singh said.
“The Commission is duty-bound under the Constitution to arrive at its own independent judgement. How we intend to exercise that is entirely up to us. But the fact remains from six months ago to now the numbers on nominal GDP look more problematic. The best-case scenario is that the first quarter is a just a blip and the subsequent quarters will work out to be somewhat better,” Singh said.
The medium-term fiscal policy statement, tabled as part of the Union Budget 2019-20, forecasts nominal GDP for 2019-20 to grow 11 per cent year-on-year. Nominal GDP for 2020-21 is projected to grow at 11.6 per cent, and for 2021-22 at 11.9 per cent.
In real terms, the growth rates for 2020-21 and 2021-22 work out to 7.3 and 7.5 per cent, according to the statement.
GDP grew at 5 per cent in April-June 2019, the slowest since 2013, on account of subdued economic activity in sectors, from services and manufacturing, to agriculture and construction. But more importantly, the economy grew at 8 per cent in nominal terms — because of low levels of inflation — the slowest since the third quarter of 2002-03.
When asked how the 15th FC would come up with its own estimates, Singh said no decision had been taken on that yet. “I cannot prejudge on that but I have to take all these into account, come to a conclusion, and project a number. Now there are several ways I can do it but I do not know what I am finally going to adopt,” Singh said, adding that meetings had been held with think tanks like the National Institute of Public Finance and Policy.
At the next GST Council meeting, Singh won’t be accompanied by other members of the 15th FC. Hence it won’t be an official meeting of the 15th FC and GST Council, though views will be shared on a number of issues, he said. “As it stands, the GST compensation period ends in 2021-22, two years into our award period. A number of states have asked whether it can be extended by three more years to 2024-25 to be co-terminus with the 15th FC award period. We will continue those discussions at the meeting,” said Singh.
15th FC report to have 4 volumes
BS Reporter
The Fifteenth FC’s report, expected on November 30, could have four volumes, said an official with knowledge of the matter. “One (will be) the main report, two the statistical data and appendices, three a volume on states, and four a volume on the Union,” the person said. The Commission is also in a bind on what to do with devolution to the newly formed Union territory of Jammu and Kashmir.

No silver bullet: Benefits of bank mergers to be visible only in long term

With every passing day, India’s economic indicators are turning a little bleaker. The situation is bad enough to warrant using the word “crisis,” arriving just as the government’s fiscal ammunition is spent.
The announcement Friday of 5% GDP growth in the June quarter showed the economy growing at its weakest pace in six years. On Sunday, the top six carmakers reported a 29% drop in August sales, stoking fears that the slowdown could get still worse. The Rs 982 billion ($13.7 billion) collected in August via the goods and services tax, the main tax on consumption, was the smallest in six months.
This adds pressure on the central bank — both to cut its policy rate and to ensure that commercial lenders pass them on to borrowers. To the extent that the more inefficient state-run banks are a drag on credit, New Delhi said Friday that as many as 10 of them will be merged into four.
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Whether folding one weak bank into another will make the combined entity any stronger remains to be seen. What’s clearer is that these lenders will spend the next six months on integration. Putting their balance sheets to work may take a backseat. Pending consolidation, the lenders might also be hesitant to issue new bank guarantees, especially to private-sector bidders for road projects. Thus, one of the few areas where there’s new investment may be affected, especially with a sharp rise in debt levels of the government agency that gives out the contracts.
ALSO READ: Govt's mega bank overhaul may hurt NPA clean-up, fight against growth slump
A hefty injection of Rs 552.5 billion of taxpayers’ money into the merged banks will only help them provide for the bad loans that will get lumped together. Capital for growth remains elusive. State Bank of India, the largest lender, will require Rs 150 billion in the current fiscal year, according to ICRA Ltd, an affiliate of Moody’s Investors Service.
The benefits will only be evident in a few years. The new round of consolidation will bring down the number of state-run banks to 12 from 27 just a few years ago. These lenders will have no choice but to become more competitive because they’ll have to price consumer loans by linking them to the central bank’s policy rate. Since they aren’t very good at lending against cash flows, the government wants them to originate loans together with non-bank financiers. Currently, even the shadow banks are stressed. Over time, though, this should help boost the underwriting standards of state-controlled lenders. Credit flows to smaller firms, which supply goods and services to larger companies, will improve.

ALSO READ: Big bank theory
Making the most of vendor finance will require plugging India into global supply chains first. By offering the likes of Apple Inc and Ikea less restrictive access to its billion-plus population, New Delhi is hoping for long-term sourcing wins from the rapidly deteriorating trade relations between Washington and Beijing.
But while taking much-neglected steps to position India as an alternative to China is a welcome move, the gains won’t be immediate. Before committing to a new factory in India to both sell locally and to export, investors will want to see steadier final demand in the domestic economy. Maruti Suzuki Ltd, the nation’s biggest carmaker, is struggling to push out 100,000 cars in a month to dealers ahead of the festival season. That isn’t exactly a great advertisement to dangle before new entrants.
Good things will come from all the tinkering – just not now. Weakening global growth means India can’t even use a weak currency to export its way out of trouble. This isn’t the time to talk loudly about wanting to become the next China. A hawkish Washington won’t want to see mercantile strategies being deployed by yet another large labour-surplus nation.
ALSO READ: Short- and long-term measures needed to spur economic growth: India Inc
Prime Minister Narendra Modi’s best hope will be to use the crisis to mend his government’s frayed relationship with the private sector. Giving startups a reprieve from a seven-year-old law, one that was used by tax authorities to harass them with impunity, is a good move.
Admitting that there are design flaws in the consumption tax and fixing them — perhaps by bringing separately taxed petroleum products into its ambit — should be the next step. Like with the bank mergers, the gains will take time to become evident, even as the pain gets visibly worse.

GDP data confirms demand slowdown; consumption expenditure at 17-qtr low

The gross domestic product (GDP) data released on Friday confirmed distress stories emanating from different sectors. The private final consumption expenditure (PFCE), which reflects demand in the economy, grew 3.14 per cent in the first quarter (Q1) of 2019-20 (FY20) — a 17-quarter low.
The PFCE grew by 7.2 per cent in the previous quarter (January to March or Q4 of 2018-19 or FY19). In the year-ago period, PFCE growth was 7.31 per cent.

Economists and analysts identified this as the most distressing signal.
“Collapse of private consumption demand growth from 10.6 per cent in Q4FY18 to 3.1 per cent in Q1FY20 is the real cause of concern,” said Devendra Pant, chief economist at India Ratings.
He added, “Both structural and cyclical issues are plaguing the economy. In order to bring the economy back to a respectable growth path, both short- and long-term measures are required.”
Also, the PFCE’s share in GDP declined to a seven-quarter low of 57.7 per cent in Q1FY20. In Q4FY19, it was 59.3 per cent, and it was 58.7 per cent in Q1FY19.
Demand is a function of sentiments, said Ranen Banerjee, leader of public finance and economics at PwC India, adding that at the moment, it was negative because of slowdown and job losses. “When sentiments are negative, people spend less, at least their discretionary spending is less,” he said.
GDP data confirms demand slowdown; consumption expenditure at 17-qtr low Banerjee said negative sentiments feed into slowdown and this viscous cycle needed to be broken. “If only monetary stimulus is looked at to turn around the economy, I don’t think it will work,” he said.
Stories of slowdown in demand have been coming in from the auto and the fast-moving goods (FMCG) sectors for a while now. According to an ICRA note, passenger vehicle sales is likely to decline to 4-7 per cent this financial year.
The auto industry has already registered a 21.6 per cent de-growth in the first four months of 2019-20, ICRA said, adding in the short-term, prevailing subdued rural and urban sentiments would have an impact, besides the BS-VI emission norms.
Varun Berry, managing director at FMCG major Britannia, had earlier said if a customer needed to think twice before buying a product priced at Rs 5, there was some problem in the economy.
However, a look at the index of industrial production (IIP) data, growth in the FMCG sector was not really muted in Q1FY20. It stood at 7.3 per cent, compared to 1.8 per cent in Q1FY19.
Consumer durables, however, have suffered. The industry contracted 1.1 per cent in Q1FY20, against 8 per cent growth in Q1FY19. Motorcycles and two-wheeler production contributed 0.2 per cent contraction in the IIP in June. Auto components also pulled down the IIP by 0.2 per cent.

Govt remains committed to its fiscal glide path, says CEA Subramanian

Attributing the slowdown in GDP growth to domestic and global factors, Chief Economic Adviser K V Subramanian on Friday said the government is taking various steps to boost economic expansion.
The gross domestic product (GDP) data released by the National Statistical Office earlier on Friday showed that growth in the first quarter of the current fiscal slipped to an over six-year low of 5 per cent.

"The slowdown in growth is due to endogenous and exogenous factors," Subramanian said while commenting on the data.
He said the government is taking all steps to revive the economy and expressed confidence that the country would be on a high-growth path "very soon".
The government remains committed to its fiscal glide path, he added.
"The government is alive to the situation and has taken several measures including mega merger of banks (announced during the day)," he emphasised.
Finance Minister Nirmala Sitharaman on Friday announced merger of 10 public sector banks into four, thus bringing down the number of state-run lenders to 12 from 27 in 2017.
Besides this, the minister had announced a slew of measures last week, including steps to increase liquidity in the critical NBFC sector.

Low manufacturing with little support from govt spend pulled economy down

The economic growth numbers for the April-June 2019 period were widely expected to indicate further deceleration. Yet, when these numbers were released on Friday, there was surprise all around.
The gross domestic product (GDP) for the first quarter of 2019-20 grew by just 5 per cent, a seven-year low. The gross value added (GVA) at basic prices grew at an even lower rate of 4.9 per cent. A year ago in April-June 2018, GDP growth was 8 per cent and GVA growth was 7.7 per cent.

The surprise, however, lay in the extent of the deceleration and its causes.
For the second successive quarter, India's GDP growth stayed below 6 per cent, from 5.8 per cent in January-March 2019 to 5 per cent in April-June 2019. This is the first time that India's GDP growth stayed below 6 per cent in two successive quarters since the Modi government's formation in 2014. Worse, a below-5 per cent GDP growth rate was narrowly escaped and the GVA print was already below the 5 per cent mark.
The chief culprit for the economic growth decline was the manufacturing sector. It grew by just 0.6 per cent in the April-June 2019 quarter, compared to the double digit growth of 12.1 per cent in the same period of 2018.
Queering the pitch were also the agriculture sector, that grew by just two per cent (down from 5.1 per cent in the same quarter a year ago) and the construction sector, which grew by 5.7 per cent, compared to 9.6 per cent in the same quarter of 2018.
In the past, a decline in the manufacturing sector growth has been compensated by a sharp rise in government expenditure. For instance, in April-June 2017, the manufacturing sector contracted by 1.7 per cent. Yet, the overall GDP growth was estimated at 6 per cent. And this was largely possible because of a 14.8 per cent rise in public administration, defence and other services (representing government expenditure in general).
In the April-June 2019 quarter, however, government expenditure grew at 8.5 per cent and could not make a difference to the overall GDP rate. The government's tight leash on expenditure in its attempt to rein in the fiscal deficit at a time its tax revenues have slowed down has had an impact on the GDP numbers for the last quarter.
The sector that saw a healthy rise in the last quarter was electricity, gas, water supply and other utility services. It clocked a growth rate of 8.6 per cent, compared to 4.3 per cent in the previous quarter and 6.7 per cent in the same quarter a year ago. This sector is now showing signs of a revival, led to some extent by an increase in power consumption. Other services like trade, hotels, transport and communication maintained their pace of growth at 7.1 per cent in April-June 2019, better than 6 per cent in the previous quarter and a shade lower than 7.8 per cent in the same period of 2018.
The stress in the financial and real estate sectors continued to be reflected in the growth numbers estimated at 5.9 per cent for the last quarter, compared to 9.5 per cent in the January-March 2019 quarter.
One area of concern was how consumption expenditure fared in the first quarter of 2019-20. Government final consumption expenditure inched up from 9.9 per cent of GDP in the January-March quarter of 2019 to 11.8 per cent in the April-June 2019 quarter.
However, private consumption expenditure showed a dip from 56.8 per cent of GDP to 55.1 per cent in the same period. The decline in the share of private final consumption expenditure in GDP is an indication that consumption demand in the economy is still a cause for concern. Indeed, it is still falling.
A positive signal that emerges from the otherwise gloomy growth numbers is in the area of gross fixed capital formation. As per cent of GDP, gross fixed capital formation or the investment rate in the economy was estimated at 32.5 per cent, a little higher than 30.7 per cent estimated for the January-March 2019 quarter. If this trend can be maintained, perhaps the GDP print for the coming quarters may look up.

GDP shocker: At 5%, Indian economy grows slowest in over six years

Gross domestic product (GDP) in India grew at 5 per cent in April-June 2019, the slowest since 2013, on account of subdued economic activity in sectors, from services and manufacturing, to agriculture and construction.
But more importantly, the economy grew at 8 per cent in nominal terms — courtesy low levels of inflation — the slowest since the third quarter of 2002-03, taking into consideration the previous two series of national accounts.

Nominal GDP growth is a proxy for growth in incomes, and the current slowdown signals a sharp fall in the latter. Further, the Union Budget has assumed an 11 per cent nominal growth rate, and a tax revenue growth rate of more than 15 per cent. The fiscal balance of the Union and state governments could see trouble because poor nominal growth adversely affects tax collection.
Various high-frequency indicators such as sales of passenger and commercial vehicles; production of capital goods, consumer durables, steel and cement; use of air travel, among others, had shown contraction, or poor growth, in the April-June period. The official growth estimate falls in line with this trend.
Chief Economic Advisor Krishnamurthy Subramanian, however, attributed the slowdown chiefly to a global economic downturn.
“Impact comes, especially, from global headwinds due to deceleration in developed economies, Sino-American trade conflict etc. Similar phenomena were observed previously during Q4 2012-13 and Q4 2013-14, when growth was around 5 per cent,” he said in a series of tweets.
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Bibek Debroy, chairman of the Prime Minister's Economic Advisory Council, said he expected the economy to grow faster in coming quarters, which should not be “lightly dismissed” when many countries in the world were “struggling to find positive growth”.
China grew at 6.2 per cent in the June quarter, according to its official data.
Private spending grew at 3.1 per cent, one of the slowest rates since the new national accounts series began in 2012. Investments (gross fixed capital formation) grew at 4 per cent, reflecting poor sentiment among investors and big companies. Government expenditure grew at a faster rate than the economy.
Experts raised concern over the grim picture of the economy. “There are both structural and cyclical issues are plaguing the Indian economy. As construction/real estate are biggest employers after agriculture, reviving real estate is crucial for an uptick in investment and consumption,” said Devendra Pant, chief economist at India Ratings.
Manufacturing stagnated, growing just 0.6 per cent over the same quarter of the previous year. The sector has seen protracted slow growth since FY18. The services sector grew at just below 7 per cent in real terms. Only thrice in the last seven years have services grown slower than this.
Agriculture and construction grew at 2 per cent in Q1 FY20. These sectors traditionally provide millions of jobs to farm and industry labourers in the unorganised sector. A slowdown in the June quarter appeared more pronounced due to an unfavourable base effect, too, because the economy had grown at 8 per cent in the first quarter of FY19.