Economists see no V-shaped recovery after Q2, say any spending cut will hit growth.
The economy may be in the midst of a protracted phase of slowdown and the weakness could stretch into the next fiscal, as green shoots of a recovery in key indicators — from industrial production, exports and corporate sales to non-food credit growth — are barely visible.
Economists, who were earlier optimistic about a rebound in the September quarter itself, are now much less sanguine and believe growth didn’t hit the rock bottom in the three months through June; rather, it may have dropped below 5% for the first time since the last quarter of FY13 in the July-September period.
Even after that, it’s unlikely to be a V-shaped recovery despite a favourable base, as any compression in the government’s capital expenditure — which has an impressive multiplier effect of over 2.4, according to Yes Bank chief economist Shubhada Rao — in step with a shortfall in tax revenue to avoid fiscal slippage, will hurt demand. The recent sharp corporate tax cut will draw private investments only in the medium term, and that, too, is contingent on further reforms in factors of production like land and labour (which the government is now willing to do), some of them say.
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The offtake under PM-Kisan, which would directly aid rural demand instantly, is expected to drop by some Rs. 20,000 crore in FY20 from the budgeted target of Rs. 75,000 crore, for various reasons, including some states’ reluctance to share farmers’ data. But this, economists feel, is a rather undesirable way of saving at this critical juncture.
Pronab Sen, former chairman of the National Statistical Commission, said: “Rural distress is the root cause of faltering demand in the economy. Unless that is addressed through stepped-up spending on rural India-specific programmes, including NREGA, rural roads, micro-irrigation and PM-Kisan, rural demand is unlikely to turn around soon.” According to him, the corporate tax cut could woo investors only in the medium- to long-term, and any reduction in personal income tax now won’t help much either apart from further pressuring the finances, as most in the rural hinterland are outside the ambit of income tax. Procurement machinery needs to be activated in a big way in vulnerable areas to avoid distress sales by farmers of kharif crops that are being harvested.
If properly implemented, the fresh government push for real estate through a Rs. 25,000-crore fund (with SBI and LIC, to start with) may potentially free up a fraction of household income for discretionary spending. But even that will take some time to feed through to the real economy.
Sonal Varma, managing director and chief India economist at Nomura, wrote in her latest report: “With tight domestic credit conditions persisting amid weak global demand, we now expect India’s recovery to be delayed and the pick-up to remain below potential. We lower our GDP growth projections to 4.9% y-o-y (from 5.7%) in 2019 and to 6.0% (from 6.9%) in 2020.”
Global growth in 2019, meanwhile, is expected to drop to just 3%, the lowest since the sub-prime crisis a decade ago, according to IMF.
Citing growth concerns, Moody’s last week trimmed India’s sovereign rating outlook to “negative” from “stable”. Already, industrial production shrank in August, hitting an 81-month trough, while eight core infrastructure industries witnessed their worst contraction at least since April 2005 in September. Exports declined in three of the first six months of this fiscal, and banks’ non-food credit growth was hovering around a two-year low of 8.79% in the fortnight through October 25.
As for the financial sector, banks remain risk-averse, while the ability of most non-bank lenders to improve credit flow remains stunted after the IL&FS crisis. The persisting concerns about the health of NBFCs, which account for a sizeable chunk of vehicle loans in recent years, threaten the nascent recovery in car sales in the festive month of October.
The health of DHFL continues to stoke concerns and the crisis at PMC Bank highlights new risks emanating from the cooperative structure.
The recent steps taken by the finance ministry, including those for MSMEs, NBFCs/HFCs and exports, will certainly help but their positive impact will flow in only after a time lag, according to some economists.
India Inc’s revenue plunged 3.82% in the July-September period, according to a sample of 693 companies (excluding banks and financials), although it managed to control expenses, thanks to softer commodity prices, and improve operating margins sequentially.
The monetary policy committee has been amenable to growth concerns and has cut the repo rate by 135 basis points in 2019, though economists believe that the cost of capital still remains among the highest in the world.
According to noted economist Surjit Bhalla, while the average real interest rate of OECD countries is -0.5%, ours is 2.5%.
Finance minister Nirmala Sitharaman has said the government is considering steps to reduce the impact of market-distorting high small savings rates.