As I mentioned yesterday (see
here), the stock markets have shown commendable resilience to the COVID-19 induced
lockdown, the economies around the world have unfortunately not been so
defiant. The global economy is witnessing its worst economic collapse since the
great depression of 1930. Unlike 2008-09 meltdown, this time the Indian economy
is no exception to the global trend and is witnessing the worst ever slowdown
in the history of post independence period. In past 40yrs, since FY80, when
Indian economy declined by 5.2%, we have not seen any year of negative growth.
Economic growth collapses, long term growth curve shift
downward
The economic growth in India has been declining structurally
since the global financial crisis (GFC) of 2008-09. For couple of year,
monetary and fiscal stimulus given by the extant government to mitigate the
impact of global crisis supported the growth. However, post FY13, the growth
trajectory never looked like retracing to pre GFC levels. The down trend just
got accelerated by the COVID-19 induced lockdown of economic activity. In FY21
India is widely expected to record its worst ever recession with a negative
growth rate of -6% or worse. The more worrisome part is that the long term
growth curve in India has shifted down. The potential growth in India is no
longer 8% plus. The pivot is somewhere close to 6%. A strong number in FY22
would be purely a base effect.
The worst part is the collapse of nominal GDP growth to multi
decade low level. Even the nominal growth is likely to witness a sharp
correction in FY21.
The government's budget, revenue and expenditure targets,
sectoral allocations, and all allocation for all social and development
programs is usually based on the nominal growth numbers. The benign inflation
post GFC has resulted in a faster decline in nominal GDP growth as compared to
the real GDP growth. However, now the nominal growth has reached the level
where a decline would directly result in lower wages, lower rental and lower
returns on savings.
A sustained downward trend in nominal growth may result in some
dramatic adjustments in socio-economic structure. The effective rate of
taxation may have to be raised considerably to meet the social development
targets. The household savings that have been a traditional source of safe and
steady funding for both corporate and government may decline widening the gap
for fiscal and corporate funding. The socio-economic inequalities may rise
materially as the poor and middle classes become sustenance households (earning
just to meet the expenses, just like developed economies) without any material
social security benefit.
- Infrastructure investment had been on the decline since FY13. The lockdown has accelerated the decline further. The private sector investment in infrastructure building has declined materially.
- Domestic demand has collapsed to worse since GFC at least. GVA (ex Agri and Govt Expenditure) has declined much faster.
- Capacity utilization is worst in decades, though it has seen some marginal improvement in June.
External vulnerability though less pronounced this time
Despite the severe economic down trend and sovereign rating
downgrade, the external vulnerability of India have been significantly less
pronounced as compared to previous episodes of downtrend.
- The trade balance has show significant improvement.
- INR has been very resilient despite the FPI selling and rising outward remittances.
Fiscal condition worsens materially, monetary easing
accelerates
The fiscal gap for FY20 increased to 4.6% of GDP, the worse
since FY13. The gross issuance by state and center is expected to top Rs20trn,
almost 50% higher than FY20. However, ample liquidity and sharp easing by RBI
has ensured that rates continue to remain benign and funding of fiscal gap does
not become much of a problem.
- In past five years, since July 2015, RBI has halved its benchmark repo rate 8% to 4%, lowest level seen in decades. Despite this we have not seen any signs of acceleration in economic growth. The credit growth has remained low and is expected to plunge to zero by end of this year; as the supply of money (deposits) continue to outpace the demand (credit)
Wholesale prices enter negative territory in May 2020
The wholesale price index (WPI) based inflation in the month of
May 2020 slipped into deflation for the first time in nearly 4 years.
(Important to note that WPI for May, 2020 has been compiled at a response rate
of 75% and will undergo a revision). WPI cooled off mainly due to broad based
deflation seen in all segments viz; primary articles, fuel and power and
manufactured products. The rate of inflation based on WPI Food Index decreased
from 5.2% in March, 2020 to 2.3% in May, 2020, the lowest in the past 16
months.
First synchronized global recession since 1930
The global economy is expected to shrink more than 5% this year,
in the most synchronized slowdown since the great depression of 1930s. The global
trade has collapsed; delinquencies are rising and the central banks are doing
whatever it takes to prevent markets from freezing, learning a lesson from
2008-09 global financial crisis.
To sum up, the economic realty looks ugly and the chances of any
V shaped recovery appear remote. Especially in case of India, the economic
slowdown that started many years ago may end in next few quarters, but the
recovery will be feeble and Indian economy may not attain a sustainable 8%+
growth potential for many years.
