In one of his recent interview, Brian Coulton, the Chief
Economist at Fitch Ratings, emphasized that the persisting credit squeeze in
the Indian economy may hurt the economic growth much more than the present
estimates. Brian cautioned that the GDP growth in FY20 could slip to 5.5%, much
below the current RBI and government estimates of 6%+ growth.
For records, the Indian economy grew at the rate of 5% in the
first quarter (April to June 2019) of the current fiscal year, the slowest in
more than 6 years. The slowdown was visible in all sectors of the economy
including agriculture, manufacturing and services. Within services, the growth
in finance, insurance and real estate sectors was cited as particularly
worrisome, as it highlighted poor credit conditions.
Besides, the credit availability, the high cost of credit is
cited as one of the constricted factors. Despite 135bps cut in policy rates in
the year 2019, the real rates are found to be still elevated, constraining the
growth.
The GST collections for the month of September have reported at
Rs 95,380cr a year-on-year decline of 5 percent and 3 percent lower than the
monthly average of Rs 98,114 crore for FY19. The GST collections in FY20 have
been consistently below the budget estimates. Juxtaposed to the shortfall in
income tax collection, it does not augur well for the fiscal balance. The scope
for the fiscal stimulus as widely anticipated by the market participants
appears very limited. In fact, the government may actually be forced to
increase the effective taxation for the affluent section of the society in the
forthcoming budget.
Reportedly, housing sales declined 9.5 percent during
July-September period across nine major cities to 52,855 units on low demand as
economic slowdown and liquidity crisis weighed on buyer sentiment. As per the
PropEquity data quoted by Bloomberg, Chennai saw the maximum fall of 25 percent
in housing sales at 3,060 units during July-September 2019 as against 4,080
units in the year-ago period. Housing sales dropped 22 per cent in Mumbai to
5,063 units from 6,491 units, followed by Hyderabad that saw 16 per cent
decline to 4,257 units from 5,067 units.
Notwithstanding some encouraging sound bites from the corporate
leaders this Diwali, the recently released data on core sector growth belies
the optimism. The growth in India’s core sector output contracted 5.2% in
September 2019, its worst performance since 2005. All sectors in the core
index, with the exception of fertilisers, posted a contraction. The data
indicates the economy may have slipped further in the 2QFY20, confirming the
fear of rating agencies and economists. As per some estimates the GDP growth
rate for 2QFY20 could be closer to 4% rather than 6% as widely anticipated.
Two short points I would like to make here are as follows:
- The growth slowdown is real, persistent and widespread. A part of this is certainly cyclical, but treating the entire thing as such may be misleading. The structural part of the downward shift in growth curve needs to be acknowledged, identified and treated separately.
- The adhoc stimulus must be directed at boosting both consumption as well as investment demand. The measures like corporate tax rate restructuring, and ease of doing business shall have impact only in due course; and for these measure to have any impact the wheels of the economy must be kept in motion.
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