In the last three years, NBFCs (here we also include the housing finance companies) accounted for nearly a third of incremental credit.
In the last three years, NBFCs (here we also include the housing finance companies) accounted for nearly a third of incremental credit. Alas, following a default by a large unlisted NBFC in September, several other NBFCs are finding it difficult to roll over their liabilities. It does not seem likely that growth in NBFC credit will come to a complete halt, though.
Some of the lending activity is likely to shift back to mainstream banks that were dis-intermediated in recent years. Already, commercial banks’ personal loans book has grown at a healthy pace of 18% in the first nine months of 2018, y-o-y. Mainstream banks could take up a part of the lending activity, leaving a growth drag of about 30 bps.
A sector-wise analysis further suggests that the 30 bps growth drag is likely to be most visible in housing, followed by SMEs and then retail. Overall, expect GDP growth to fall from 8.2% in Q1FY19 to 6.5% in Q4 as the base normalises, the shadow banking fallout slows credit growth, financial conditions tighten, the fiscal target narrows the space for growth stimulus, and election uncertainties defer private spending.
Lower oil prices benefit the entire macroeconomy, and India’s external finances the most. Historically, a Balance of Payments (BoP) deficit has been associated with a weaker rupee. No surprise, then, that the ` has depreciated 10% year-to-date on a REER trade-weighted basis and 14% vis-à-vis the USD. For the next two years, if we assume oil at $80/bbl, a BoP deficit (of $10-15 billion per year) could linger. Instead, if oil averages $70/bbl (which is where it is trending now), the savings in the C/A deficit could erase the entire BoP deficit for the next two years.
Having said that, taking solace in low oil prices is risky for two reasons: Oil prices remain volatile and could rise back up. If so, the current respite could be temporary in nature. More importantly, lower oil, and the consequent relief on the BoP, tends to hide some structural weaknesses. For instance, India’s non-oil exports had fallen by 4% of GDP over FY14-FY18. In fact, while the overall current account balance improved (the deficit narrowed) during this time, the underlying non-oil current account balance worsened (the surplus narrowed) by 3% of GDP. If lower oil prices now postpone structural reforms further, India’s macroeconomy could become more vulnerable over time.
Despite higher oil and core inflation, headline inflation in India has remained remarkably tame, led by a sharp food disinflation. What’s going on? Improved supply logistics—more nimble supply management by the government, increased direct food procurement by the private sector, and more efficient transport logistics are likely contributors of low food prices. The overall demand for food has also fallen rapidly since FY14. This is particularly noticeable in high value items like vegetables and proteins, which rural Indians consume in larger quantities when their incomes rise.
Another possible reason behind low domestic food inflation could be the ongoing weakness in global food prices, making exports of agricultural goods less remunerative. The long-term average of food inflation has been 7.3% (since 2010). Over the last year, it has averaged 2.8%. On average, food inflation will finally rest at a mid-point of about 5%. The exact timing of food inflation moving upwards towards 5% will likely depend on when rural India starts to demand high-value food items.
On a sequential (q-o-q) basis, rural incomes have been improving. This has been driven primarily by non-agricultural activity (particularly government sponsored construction activity), which eventually lifted agricultural wages. However, rural incomes are still growing at a weak y-o-y clip. And until y-o-y rural wage growth rises, food inflation is likely to remain subdued. If public sector construction activity slows following the national elections in 2019 (as the government shifts its focus back to fiscal consolidation), we believe that rural incomes, and with them food inflation, will remain contained for longer.
Expect modest repo rate hikes of 50 bps in 2019, and a prolonged pause thereafter. India’s fiscal finances are walking a tightrope. Shortfalls in GST tax collections, lower spectrum auctions, and oil excise tax cuts, combined with higher food and oil subsidies and a bigger interest cost bill, may lead to slippage in the central government’s 3.3% of GDP fiscal deficit target—and that is assuming no shortfall in the government’s disinvestment target of `800 billion. India’s states paint a similar picture. Data until August suggests that of the 23 states that have been analysed, nine (40%) are doing better than before, and 14 (60%) are doing worse.
However, capex and current expenditure cuts may help fill some of the fiscal gap. This, of course, will create a drag on growth. However, some of the drag can be offset by higher off-budget spending (for instance via the book of PSEs such as NHAI and NABARD). Indeed, there is evidence that off-budget borrowing has risen. Some space has been opened up by the GST Council’s decision to allow the government to dip into the surplus GST Compensation Fund.
If we assume that the surplus in the fund during the first half of the current year is replicated in H2 and combine it with the unused surplus from last year, governments could receive 0.15% of GDP in extra revenue both on the federal and state levels. These could indeed bring the Central government and the states closer to the budgeted targets. However, meeting the targets is still not a done deal.
Edited excerpts from HSBC’s Four Burning Questions (November 15)
Author is Chief economist, India, HSBC Securities and Capital Markets Private Limited. Co-authored by Aayushi Choudhary and Dhiraj Nim.