Indian economy – Silver lining amidst dark clouds?

 • India’s economy is expected to witness a slight pick up in growth in the current fiscal (2019-20), according to projections by the RBI.
• Considering the downward pressure on growth, RBI has cut key interest rates for the second time in a row by 25 basis points.
• Prospects of improving consumption growth and revival in investment could help propel the economy in the coming months.
• While exports have remained resilient this year, continuing slowdown in global economies coupled with trade tensions could pose a downside risk in the current fiscal.

India’s GDP growth slowed down to 7% in FY 2018-19, as per preliminary official estimates, compared to 7.2% in FY 2016-17. Agriculture grew at 2.7%, its lowest rate in three years and the services sector clocked a growth of 7.4%, its lowest in 7 years. But growth in industry has been strong at 7.7% led by manufacturing (8.1%) and construction (8.9%), even as mining grew at a much lower 1.2%.

Asia Development Bank has projected a slight pick-up in growth to 7.2% in FY 2019 and rise to 7.3% in FY 2020. RBI has reduced India’s growth projection for 2019-20 from 7.4% to 7.2% as it cut the key interest rate by 25 basis points to 6% in its latest review. According to RBI estimates, if global growth drops 50 bps below the baseline, domestic GDP growth and inflation are expected to be 15-20 bps and 10 bps below the baseline respectively.

RBI commented on the current challenges facing the global economy, “Further escalation of trade tensions and protectionist trends; increased volatility in global financial conditions over the uncertainty of the stance of monetary policy in the US and other advanced economies; uncertainty surrounding Brexit; a sharper slowdown in the Chinese economy and deviations of the south-west monsoon from the baseline assumption of a normal monsoon may pose downside risks to the baseline growth path.” With inflation estimated to stay below 4%, RBI seems to have decisively shifted its focus to sustaining the growth momentum, given the concerns on the global front.

In this analysis, we take a look at how the current fiscal could pan out for the Indian economy on three critical fronts – consumption, investments and external trade.

Ready to shop again?

The liquidity crunch in the NBFC space that ensued after the IL&FS imbroglio continues to cast its shadow over India’s moderating consumption growth story, evident from the slowdown across sectors like automobiles and consumer goods. The government’s initiatives towards income support to farmers (particularly through the recently announced PM Kisan Samman Nidhi Yojana) and increase in the procurement prices for food grains are expected to boost rural consumption in the coming year. Even the urban consumption story could get better owing to cuts in interest rates, low food prices and declining prices of fuel.

Notably, the RBI’s index of consumer confidence for the quarter ending March 2019 found consumers to be positive on the current economic situation for the first time in two years, and ‘the future expectations index reaching an all-time high. Expectations of inflation over the next year also dropped by 40 basis points as compared to December 2018.

However, there will be a time lag before the effects of the rate cuts are felt, depending on how the banks pass them on to customers. Banks were unable to do so in the previous quarter. As bank credit grew by 14-15%, deposit growth was lower at 10%. This led to growth in credit to deposit rate of banks to a high-risk 78, making it tough for them to cut rates.

Cleaning up for a new cycle

Bank credit growth accelerated from 7% in FY 2017 to 11.9% in FY 2018. There are signs of positive outcomes on initiatives taken to address the bank NPA problem through measures like the review of stressed assets, introduction of the Insolvency & Bankruptcy Code, 2016 and recapitalization of a few selected banks. Share of non-performing loans dropped from 11.5% in March 2018 to 10.8% in September 2018, declining for the first time since 2016. Rating agency ICRA projects that fresh bank NPAs could moderate to 1.9-2.4% in FY’20 as compared to 3.7% in FY’19. It also expects 14 public sector banks to turn profitable in FY’20.

Improved balance sheets for both corporates and banks should aid a revival of the private investment cycle. RBI’s industrial outlook survey for the quarter ending December 2018 showed business expectations at a 4-year high. Similarly, the share of respondents who anticipated an improvement in capacity utilization in the coming months was at a 6-year peak. Improvement in consumer demand could be positive for manufacturing.

However, growth in investment remains sluggish. The Nikkei India Manufacturing Purchasing Manager’s Index dropped to 52.6 in March from a 14-month high of 54.3 in February 2019. Companies expect capacity expansion, marketing initiatives and favourable government policies to promote growth in production after the elections.

Sustaining growth amid global headwinds

The growth in imports slowed down to 9.8% during FY 2018. Oil imports grew by over 32% but there was a slowdown in capital goods and decline in gold imports. Exports grew by 8.9% especially owing to refined petroleum exports. Comparatively, non-oil exports grew by just 6%, despite strong growth in electronics, chemicals, pharmaceuticals, machinery and textiles. Services surplus grew by just 3% despite revival in software exports.

Shri Suresh Prabhu, Hon’ble Minister for Commerce & Industry, Government of India, commented that India’s merchandise goods and services exports are estimated to have reached US$ 520-540 billion in 2018-19, resulting in a decline in the trade deficit by around US$ 10 billion. Merchandise exports are expected to have reached a record US$ 330 billion during 2018-19.

However, India’s exports could be impacted due to unfriendly global headwinds in the current fiscal. The WTO has cut its forecast for growth in global trade from 3.7% to 2.6% in 2019, owing to persistent trade tensions, weak growth prospects for industrial countries as well as rising global uncertainty. ADB projects export growth to drop to 7% in FY 2019 due to slowdown in industrial economies.

To summarise, India’s growth outlook is slightly more positive for 2019 due to lower inflation, prospects of a reviving private investment cycle and improvement in consumer demand in both urban and rural segments of the population. While India’s export performance has been relatively resilient in 2018-19 despite global trade tensions, the current fiscal could prove more challenging due to a number of extraneous factors continuing to impact international trade.