Where next for the economy of India?

A subject we returned to several times in 2019 was the economy of India. There were two main drivers here which were interrelated. One was the economic slow down and the second was the wave of interest-rate cuts we saw from the Reserve Bank of India. At the moment India is back in the news on two fronts. Firstly President Trump is in town although by his pronounciation of Sachin Tendulkar he had a lot to learn about the national sport. Second and much more sadly there are riots in Delhi continuing a recent theme of unrest in India. For our purposes though, we need to switch back to the economic situation and how India can deal as best as it can with the economic effects of the Corona Virus.

Where do we stand?

The latest minutes from the Reserve Bank of India tell us this.

Moving on to the domestic economy, the first advance estimates (FAE) released by the National Statistical Office (NSO) on January 7, 2020 placed India’s real gross domestic product (GDP) growth for 2019-20 at 5.0 per cent.

Whilst these would be considered fast numbers for elsewhere they are really rather underwhelming for India. Indeed numbers for the past are being revised down as well.

 In its January 31 release, the NSO revised real GDP growth for 2018-19 to 6.1 per cent from 6.8 per cent given in the provisional estimates of May 2019. On the supply side, growth of real gross value added (GVA) is estimated at 4.9 per cent in 2019-20 as compared with 6.0 per cent in 2018-19.

The RBI also gave us a reminder of how much has cut interest-rates in response to this.

As against the cumulative reduction in the policy repo rate by 135 bps since February 2019, transmission to various money and corporate debt market segments up to January 31, 2020 ranged from 146 bps (overnight call money market) to 190 bps (3-month CPs of non-banking finance companies).

It will be happy to see greater impacts than its move and India’s government will be grateful for this impact too.

Transmission through the longer end of government securities market was at 73 bps (5-year government securities) and 76 bps (10-year government securities).

Although caution is required here as bond markets have been rallying anyway so it is hard to determine the exact cause of any move. However amidst the cheerleading there is something we have seen elsewhere.

Transmission to the credit market is gradually improving. …….. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans by 13 bps during February-December 2019.

This is a familiar feature of the credit crunch era where interest-rate cuts get lost in the banking system and do not reach the borrower be they individual or business.

Know Your Onions

These are a staple part of the Indian diet and back on December 2nd this was the state of play.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

This hurt consumers and especially the poor adding to the economic difficulties faced by Indians. Well according to the Times of India things are now much better.

PANAJI: After burning a hole in the pockets of the common man for over three months, prices of onions have come down to  ..Rs 29 per kg at the outlets run by the Goa State  Horticulture Corporation Limited (GSHCL).

Whilst the onion crisis has faded from view the inflation situation has got worse with the annual rate rising to 7.59% in January. In spite of the fall in Onion prices it is being pulled higher by food (and drink) inflation which is 11.79% as the inflation shifts.

On the other hand, the recent pick-up in prices of non-vegetable food items, specifically in milk due to a rise in input costs, and in pulses due to a shortfall in kharif production, are all likely to sustain. ( RBI)

Looking back we see an index set at 100 in 2012 is now at 150.2 so India has seen more inflation than in many other places. I will let readers decide for themselves about housing inflation at 4.2% because in other countries we would consider that to be high but for India perhaps not.

Copying the Euro area

Firstly let us give the RBI some credit ( sorry) as we note that it got ahead of the US Federal Reserve which stumbled in this area last autumn.

Since June 2019, the Reserve Bank has ensured that comfortable liquidity is available in the system in order to facilitate the transmission of monetary policy actions and flow of credit to the economy.

Although that does rather beg a question of what it was doing in the years and decades before then! Also we seem to need more liquidity after all the monetary easing in India and elsewhere which is much more in line with my arguments that it is not working than the official claims of success.

The model was taken from the Euro area.

As announced in the Statement on Developmental and Regulatory Policies on February 06, 2020, it has been decided to conduct Long Term Repo Operations (LTROs) for one-year and three-year tenors for up to a total amount of ₹ 1,00,000 crores at the policy repo rate.

Yesterday’s one-year operation saw plenty of demand.

The total bids that were received amounted to `1,23,154 crore, implying a bid to cover ratio (i.e., the amount of bids received relative to the notified amount) of 4.9.

So the system is keen on what Stevie V called cold hard cash, dirty money and we see that there was even more demand for the longer version earlier this month.

The response to the LTRO has been highly encouraging. The total bids that were received amounted to ₹ 1,94,414 crore, implying a bid to cover ratio (i.e., the amount of bids received relative to the amount announced) of 7.8. The total amount of bids has, in fact, exceeded the aggregate amount of ₹ 1,00,000 crore proposed to be offered under the LTRO scheme.

We can add “highly encouraging” to my financial lexicon for these times. After all if LTROs are the triumph they are officially claimed to be the Euro area economy would not be where it is.

Comment

Today has been a journey through the problems faced by the economy of India. If we start with economic growth then it was weakening anyway and I have my doubts about the first bit from the RBI below.

the easing of global trade uncertainties should encourage exports and spur investment activity. The breakout of the corona virus may, however, impact tourist arrivals and global trade.

So far whilst the letter I has been over represented in the Corona Virus outbreak India has thankfully been quiet, but it cannot escape the wider economic effects.

Next comes the issue of inflation as India’s workers and consumers have been suffering from a burst of it just as its inflation targeting central bank has cut interest-rates substantially. So there will have been hardship which is fertile breeding ground for the unrest we are seeing.

Also there seems to be a thirst for liquidity in the financial sector in India. We have looked in the past at the problems of the banks there and it would seem that like in the Euro area they are in something of a drought for liquidity. The RBI deserves credit for so far avoiding the way the US central bank has ended up like a dog chasing its tail. But we return as so often to wondering why ever more liquidity is required? Which leads to whether it is merely masking underlying solvency issues.

Meanwhile The Donald is in full flow.

Trump in India: If I don’t win, you’ll see a crash like you’ve never seen before ( Maria Tadeo of Bloomberg)

The Investing Channel

 

India has an economic growth problem

As 2019 has developed we have been noting the changes in the economic trajectory of India. Back on October 4th we noted this from the Reserve Bank of India as it made its 5th interest-rate cut in 2019.

The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

This was in response to this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

For India that was a slow growth rate for what we would call the second quarter as they work in fiscal years.

What about now?

Friday brought more bad news for the Indian economy as this from its statistics office highlights.

GDP at Constant (2011-12) Prices in Q2 of 2019-20 is estimated at `35.99 lakh crore, as against `34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent. Quarterly GVA (Basic Price) at Constant (2011-2012) Prices for Q2 of 2019-20 is estimated at `33.16 lakh crore,
as against `31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent over the corresponding quarter of previous year.

The areas which did better than the average are shown below.

‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ ‘Financial, Real Estate and Professional Services’ and ‘Public Administration,
Defence and Other Services’.

The first two however slowed in the year before leaving us noting that the state supported the economy as you can see below.

Quarterly GVA at Basic Prices for Q2 2019-20 from this sector grew by 11.6 percent as compared to growth of 8.6 percent in Q2 2018-19. The key indicator of this sector namely, Union Government Revenue Expenditure net of Interest Payments excluding Subsidies, grew by 33.9
percent during Q2 of 2019-20 as compared to 22.2 percent in Q2 of 2018-19.

Regular readers will not be surprised what the weakest category was.

Quarterly GVA at Basic Prices for Q2 2019-20 from ‘Manufacturing’ sector grew by (-)1.0
percent as compared to growth of 6.9 percent in Q2 2018-19.

Also those who use electricity use as a signal will be troubled.

The key indicator of this sector, namely, IIP of Electricity registered growth rate of 0.4 percent during Q2 of 2019-20 as compared to 7.5 percent in Q2 of 2018-19.

In terms of structure the economy is 31.3% investment and 56.3% consumption. The investment element is no great surprise in a fast growing economy but it has been dipping in relative terms. The main replacement has been government consumption which was 11.9% a year ago and is 13.1% now as we get another hint of a fiscal boost.

Switching to a perennial problem for India which is its trade deficit we see that it was 3.8% of GDP in the third quarter of this year. That is a little better but there is a catch which is that it has happened via falling imports which were 26.9% of GDP a year ago as opposed to 24% now. So another potential sign of an internal economic slowing.

We can move on by noting that this time last year the GDP growth rate was 7% and that The Hindu reported it like this.

Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%, the government announced on Friday.

The lowest GDP growth in six years and three months comes as Parliament has been holding day-long discussions on the economic slowdown, with Union Finance Minister Nirmala Sitharaman assuring the Rajya Sabha that the country is not in a recession and may not ever be in one.

4.5% growth is a recession?

Unemployment

The numbers are rather delayed am I afraid leaving us wondering what has happened since.

Unemployment Rate (UR) in current weekly status in urban areas for all ages has been estimated as 9.3% during January-March 2019 as compared to 9.8% during April- June 2018.

Inflation

This has been picking up as the Economic Times reports below.

Inflation touched 4.62%, according to the data released by the statistics office on Wednesday, compared to 3.99% in the month of September. Inflation, as measured by the Consumer Price Index (CPI), was 3.38% in October last year.

Sadly for India’s consumers and especially the poor much of the inflation is in food  prices as inflation here was 7.9%. Vegetables were 26.1% more expensive than a year before and it would seem the humble onion which is a big deal in India is at the heart of it. From India Today.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

For those wondering about any inflation in pork prices then the answer is maybe.The meat and fish category rose at an annual rate of 9.75%.

Manufacturing

We noted in the GDP numbers that there was a fall but this seems to have sped up at the end of the quarter as it fell by 3.9% in September on a year before driven by this.

The industry group ‘Manufacture of motor vehicles, trailers and semitrailers’ has shown the highest negative growth of (-) 24.8 percent followed by (-) 23.6 percent in ‘Manufacture of furniture’ and (-) 22.0 percent in ‘Manufacture of fabricated metal products, except machinery and equipment’ ( India Statistics)

Fiscal Policy

From Reuters last month.

After the corporate tax cuts and lower nominal GDP growth, Moody’s now expects a government deficit of 3.7 per cent of GDP in the fiscal year ending in March 2020, compared with a government target of 3.3 per cent of GDP.

Also there is this from the Economic Times.

In India, private debt in 2017 was 54.5 per cent of the GDP and the general government debt was 70.4 per cent of the GDP, a total debt of about 125 of the GDP, according to the latest IMF figures.

The ten-year bond yield is 6.5% showing us that India does face substantial costs in issuing debt.

Comment

We get another hint of the changes at play as we note this from the Reserve Bank of India in November and note that the result was 5%.

For Q1:2019-20, growth forecast was revised
down from 7.2 per cent in the November 2018 round
to 6.1 per cent in the July 2019 round.

As we look forwards it is hard to see what will shake India out of its present malaise.Of course if the daily news flow that the trade war is fixed ever turns out to be true that would help. But otherwise India may well still be suffering from the demonetarisation effort of a couple of years or so ago.

After the falls of last year the Rupee has been relatively stable and is now at 71.6 versus the US Dollar. A lower Rupee is something which gives with one hand ( competitiveness) and takes away with another ( cost of imports especially oil). But as it starts its policy meeting tomorrow the RBI will feel the need to do something in addition to changing its fan chart for economic growth ( lower) and inflation ( higher) giving us what is for India something of a stagflationary influence.

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