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.

NHAI at a crossroads on debt servicing; 'concerned' PMO raises red flags

The National Highways Authority of India (NHAI) finds itself in a spot over its deep financial stress, prompting the Prime Minister’s Office (PMO) to raise the red flag over its “unplanned and excessive expansion”. Even before the PMO’s intervention, there were signals that alerted the government to sit up and take notice.
The reluctance of lenders to fund highways built on the hybrid-annuity model (HAM), where the government itself pumps in equity to the tune of 40 per cent of the project cost, and the authority’s reliance on the EPC (engineering, procurement and construction) model for constructing roads have burdened the NHAI’s finances. EPC projects are fully funded by the exchequer.
According to SBI Caps, the proportion of debt funding has risen sharply in the recent NHAI projects. “At the same time, toll collection has grown at a very modest pace of 6 per cent for a km (from Rs 55 lakh a km in FY13 to Rs 80 lakh in March 2019).

Hence, revenue collection barely covers the interest servicing cost of these projects, let alone project returns. Thus, there is rising concern over debt servicing,” the report said.
The NHAI, sources familiar with the developments said, has become excessively leveraged with its debt, which is expected to touch Rs 2.5 trillion by the end of the current financial year. While government support has marginally fallen by Rs 36,691 crore over last year, borrowings are expected to rise by about 21 per cent to Rs 72,000 crore this year.
The NHAI’s payment outgo on account of interest is expected to be about Rs 25,000 crore annually for the next two decades or so.
Rating agency ICRA has estimated the NHAI’s contingent liabilities at Rs 63,000 crore, but this may be a gross underestimate. Experts such as former NHAI chairman Brijeshwar Singh has said in television interviews that the actual contingent liability may be five-times more at Rs 3 trillion.
ALSO READ: CAG raises concerns over burgeoning costs of NHAI's projects, cautions govt
“A 20-year financial plan for the NHAI was finalised in 2013-14, which included budgetary support from the government, and borrowing and repayment of loans. It is revisited every year and is upgraded wherever needed. The borrowings of the NHAI have increased because of reduction of funds from cess collection for road construction,” former road secretary Vijay Chhibber said.
The debt pressure comes at a time when land acquisition cost has also risen. The NHAI’s expenditure on land nearly doubled to Rs 32,143 crore in 2017-18 from Rs 17,824 crore in 2016-17, according to the latest NHAI data. “The rise in land acquisition and civil construction costs, investment (EPC and HAM projects) are turning financially unviable/unsustainable, necessitating reforms,” said SBI Caps.
Though the increase in land acquisition cost is also due to more projects being taken up, there has been a rise in compensation amount for the land owners after the new Land Acquisition, Rehabilitation and Resettlement Act, 2013.

ALSO READ: New speed breaker on India's road to $ 5 trn economy; NHAI's mounting debt
The NHAI is also likely to double its borrowings from the National Small Savings Fund (NSSF) this year and raise about Rs 40,000 crore from the NSSF in 2019-20 as part of its massive Rs 75,000-crore borrowing plan for the year. It plans to raise a similar sum in the coming years to meet the construction of national highways and expressways. The NHAI raised Rs 20,000 crore from the small savings scheme in FY19.
Prior to that, in 2017-18, the agency raised Rs 6,657 crore by way of issue of capital gains tax exemption bonds, Rs 40,875 crore from the domestic market, the EPFO, LIC, NSSF loan and Rs 3,000 crore through issuance of masala bonds from the international markets. Its income from toll collection, revenue share and premium that companies pay instead of taking grant and interest was Rs 8,840.754 crore.
Added to the NHAI’s burden are the annuity payments from the earlier BOT (annuity) contracts, which are paid every six months over a period of 12 to 18 years from the dates of completion of the projects. These amount to around Rs 47,946 crore till March 31, 2018.
"Until FY2014, the mode of project award was determined based on the waterfall mechanism that explored BOT (Toll) first followed by BOT (HAM) and then EPC, depending on the traffic density along the project stretch. This process slowed down the awards due to weak private sector participation," ICRA said in its report.
The report said the risk sharing was not balanced in the current BOT (Toll) model. Therefore, it is time to devise a new model on the lines of BOT (HAM) to reduce the upfront equity contribution for private developers to an extent.
While the government and the NHAI are trying to fix the road construction model, experts believe it is the sale of road assets that requires greater attention. According to Chibber, the road monetisation drive should fetch the government at least Rs 30,000 crore every year. However, it has only been able to raise Rs 9,000 crore through the toll-operate-transfer (TOT) model,” he added.

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.

GDP numbers raise some serious questions about the state of the economy

The GDP growth number for Q1-FY20 was not expected to be satisfactory with estimates being in the region of 5.5%. However, the 5% growth, which is now a six-year low, does raise some serious questions about the state of the economy, given that prima facie our economy does seem to be one of the best performing economies in the world. The problem remains unchanged with the manufacturing sector being the drag. Support has tended to come more from the services segments, which is now a regular feature of the profile of growth.
Low index of industrial production (IIP) growth coupled with less than 5% growth in corporate sector topline has been indicative of a low economic performance in the quarter. The principal challenges continue to be low growth in consumption and investment, which have worked against any momentum being picked up. The investment rate for this quarter has been lower at 29.7% against 30% last year. Here, too, it has been more of the government spending in infra which has provided support. Private sector investment has been lacklustre.
Most of the sectors have witnessed lower growth rates. Agriculture has posted growth of 2% against 5.1% last year. This may not be too worrisome as the first quarter is associated more with residual Rabi harvest and it would be Q3 and Q4 that would drive the final number. Given the good monsoon and a relatively stable acreage picture so far, there should be some reversal here.

Manufacturing growth has been just 0.6% against 12.1% last year. While the base effect has pushed it down, the slowdown in the auto and durable goods segments is quite palpable and is getting reflected slowly in other sectors, too. The industries that have done well like cement and steel find reflection in construction activity, which has witnessed an increase of 5.7% (9.6% last year). Here, it is the government push along with housing which has kept the rate up.
The two service sectors which have been significant contributors to GDP growth i.e. trade, communication etc. and finance, real estate etc. have registered growth of 7.1% and 5.9% respectively. The fickle GST collections and unsteady state of the NBFC segments have to be reversed for a turnaround in these segments. Banks appear to have access to liquidity but are less willing to lend for projects and prefer the retail route.
Can we juxtapose the recent reforms announced by the government against this performance?
The measures announced last week which address issues of the corporate sector and doing business environment will definitely help to an extent in the medium-term. Auto stocks were not too enthused in the market. The foreign direct investment (FDI) framework that has been introduced will work with a lag and may not be significant in terms of propping investment. The bank mergers announced along with the new governance structures and capital infusion may be seen more as housekeeping that will make the PSBs stronger but may not be able to reverse the trend in GDP growth presently.
The critical part of the story will be the kharif harvest and rural income that can add to consumption demand. Private investment would trail government effort, and the latter needs to spend what was targeted in the next three months and not wait till the end of the year. If some of the RBI surpluses can be used for spending on infra, it should be done. Otherwise, the recovery path will be slow with speed breakers. Statistically, the base effect will push back growth in Q2, too, and hence, we could have another quarter of low growth before there is a turnaround. H2 would be critical and all the pieces have to fall in place.
Madan Sabnavis is chief economist at CARE Ratings. Views are personal
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

PSB merger on expected lines; buy stocks for the long-term: Analysts

Analysts have given a thumbs-up to the government’s move to consolidate public sector banks (PSBs). Calling it a step in the right direction, analysts say this merger could be a game changer for the PSU banking space over the long-term.
ALSO READ: Amalgamating 10 govt banks into 4 entities in mega consolidation move: FM
While they see the related PSU bank stocks reacting to the development when markets open for trade next week, they suggest only those investors who can hold from a long-term horizon buy into these counters. Investors need to understand the share swap ratio and the other details of the proposed merger, they caution. That apart, there could be challenges as regards integration and the likely benefits of the amalgamation will take a long time to play out, they said.
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PSU bank merger on expected lines; buy stocks for the long-term: Analysts
“The announcement was overdue. There are synergies to be had from the proposed merger, but all this will take a long time to play out. That said, a bounce in the related counters cannot be ruled out, which the investors can capitalise on,” said Ambareesh Baliga, an independent market analyst.
ALSO READ: FM unveils merger of 10 govt banks to revive economic growth from 5-yr low
G Chokkalingam, founder and managing director at Equinomics Research agrees. He expects economies of scale to kick-in overtime if the proposed merger fructifies on-ground and aid financial performance.
“The government now needs to bring down its stake in the PSU banks. This can change the face of banking sector in the country for good. At the current levels, PSU banks can be bought from a long-term perspective,” Chokkalingam says.
ALSO READ: Government creates banking behemoths to boost India's flagging economy
PSU bank merger on expected lines; buy stocks for the long-term: Analysts
On the other hand, analysts at IIFL do not seem too enthused with the proposals and caution that except for growth on current account, savings account (CASA), and reduction in cost to income ratio, the merger of Bank of Baroda with Vijaya Bank and Dena Bank in 2018 was not appreciated by the market. That apart, the proposed merger of relatively better run Indian Bank with Allahabad Bank came in as a disappointment, they believe.
“We have not seen any significant fall in the credit cost leading to continued pressure on the stock price of BOB. Merger of relatively better-run Indian Bank with Allahabad Bank is disappointing. It may be lack of appetite for some of the weak bank that they were left out of this merger exercise. Considering that still three fourth of saving accounts are with PSB and that there could be significant cost savings by merger, we do see this to be positive for the sector for a longer-term perspective. Immediate release of funds for growth will ensure improvement in loan growth for the banks,” said Abhimanyu Sofat, Head of Research at IIFL Securities.
PSU bank merger on expected lines; buy stocks for the long-term: Analysts
PSU bank merger on expected lines; buy stocks for the long-term: Analysts

Fiscal deficit crosses 77% of budgeted target in first 4 months of FY20

The government's fiscal deficit touched Rs 5.47 trillion in the June quarter, which is 77.8 per cent of the budget estimate for 2019-20.
In absolute terms, the fiscal deficit or gap between expenditure and revenue was Rs 5,47,605 crore at July-end, as per the data released by the Controller General of Accounts (CGA) on Friday.

The fiscal deficit stood at 86.5 per cent of 2018-19 budget estimate in the year-ago period.
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The government estimates the fiscal deficit to be at Rs 7.03 trillion during 2019-20.
It aims to restrict the deficit at 3.4 per cent of the GDP in the current fiscal, same as the last fiscal.
The CGA data showed that revenue receipts of the government during April-July, 2019-20 remained unchanged at 19.5 per cent of the Budget Estimate (BE) compared to the corresponding period last year.
In absolute terms, revenue receipts stood at Rs 3.82 trillion at July-end 2019. During the entire year, the revenue receipts has been pegged at Rs 19.62 trillion.
The capital expenditure was 31.8 per cent of the BE. This compares with 37.1 per cent in the year-ago period, the CGA said.
Total expenditure during April-July period stood at Rs 9.47 trillion or 34 per cent of the BE. It was 36.4 per cent of BE in the corresponding period last fiscal.
The government has pegged its total expenditure during the fiscal ending March 2020 at Rs 27.86 trillion.
The CGA further said the fiscal deficit figure in monthly accounts during a financial year is not necessarily an indicator of fiscal deficit for the year.
Its data gets impacted by temporal mismatch between flow of not-debt receipts and expenditure up to that month on account of various transitional factors both on receipt and expenditure side, which may get substantially offset by the end of the financial year.