Vijay Kumar Gaba: economic slowdown

Showing posts with label economic slowdown. Show all posts

Wednesday, January 22, 2020

A 180 degree turn - - from saviour to a threat

A decade ago, the global economy slipped into a deep abyss, contracting by more than 2.5% in 2009, as compared with a over 4% growth recorded during 2004-2007 period and a still positive growth of over 2% recorded in 2008. The extent of the slowdown could be gauged from the fact that over 100 countries (including 33 developed countries) all across the world recorded contraction in GDP during 2009.

The global financial markets had frozen; large banks were collapsing; some European and Latin American countries were on the verge of defaulting on their sovereign obligations and needed to bailed out by IMF.

Amongst all this chaos a group of four developing countries Brazil, Russia, India and China (BRIC) emerged as the savior. These countries recorded sharp growth recovery in 2010 and saved the global economy from slithering into a deeper recession, which many feared could have been much worse than the great depression of 1930s.

A decade later, all four BRIC countries are struggling with the growth. As per the latest growth statistics Brazil, India and China are all growing at a pace much less than 2010. The global institutions that lauded these economies for being engine of global growth in 2009-10, are now holding emerging economies, especially India, responsible for pulling down the global growth.

IMF on Monday downgraded its growth estimates for India for next 2 years. As per IMF, Indian economy is now expected to grow by 4.8% in 2019; 5.8% in 2020 and 6.5% in 2021. These estimates are subject to fiscal and monetary stimulus by the government and subdued oil prices due to lower global demand growth.

Accordingly, the global growth would reach 3.3% in 2020, compared to 2.9% in 2019, which would be the slowest pace of recovery since the financial crisis a decade ago. This slow recovery in global growth in 2020 is highly contingent upon improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for underperforming emerging and developing economies such as Brazil, India, and Mexico.

The International Monetary Fund's (IMF) Chief Economist Gita Gopinath reportedly told media in Davos that "We’ve had a significant downward revision for India, over a 100 basis point for each of these years. It’s probably the most important factor for the overall global downgrade of 0.1 percent."

I have no doubts whatsoever that India and China which together house close to 3bn people, would certainly regain the economic momentum and become the engine of global growth again. But it would be foolish on my part to admit that the next couple of years are going to be extremely challenging, especially for India.

In view of the popular demands from the government in the forthcoming budget, Ms. Gopinath cautioned that the government must take steps keeping the fiscal room in mind. She said, “In the case of India, it is important that the fiscal targets are met, at least from a medium-term perspective. It is also important that when spending is done, it’s done on public investment as opposed to consumption spending.”

Ms. Gopinath cited that the poor credit growth, which is a direct fall out of the NBFC crisis, is one of primary reasons for below par economic growth. She highlighted that "In terms of the major issues to deal with, it’s the weakness in credit growth. How do you get credit growth back up while making sure at the same time that there will not be a second round of non-performing assets in the future? I think that’s the balance the government has to work towards."

Friday, January 17, 2020

Finding the contours of the economic slowdown

The recently published foreign trade data (see here) further confirmed the persisting slowdown in Indian economy.

As per the data, the non-oil non-gold imports during April-December 2019 period contracted ~8% yoy. The oil import in the same period was down ~12% yoy. If we consider ~17% rise in oil prices during this period, the fall in volume of oil import is much higher. Overall the merchandise imports contracted ~9% yoy in USD terms and ~8% yoy in INR terms during the first nine months of current fiscal.

In the nine month period during April-December 2019, the merchandise exports were lower by ~2% yoy. During this period non-oil non-gems & jewelry exports were almost flat yoy.

The services exports (up ~5.6% yoy) and imports (up ~7.5% yoy) during nine month period April-December 2019 have however recorded decent growth as compared to the merchandise trade.

Consequently, the trade balance is much lower as compared to the previous year. The overall trade balance for April-December 2019-20 is estimated at USD 57.66bn as compared to USD 89.46bn in April-December 2018-19.

As per the latest data published in September 2019, the current account deficit (CAD) of India was USD6.3bn or 0.9% of GDP in the 2QFY20 (vs 2% of GDP in 1QFY20). Given the lower trade deficit and decent capital flows, the CAD might have shown further improvement in 3QFY20. To some extent, the strength in INR could be attributed to this factor.

However, the moot point is whether the market should cheer the improved CAD data and consequently stringer INR or be worried about (a) the falling imports, especially engineering and consumer goods imports which implies slow down in consumption and (b) stagnant to contracting exports in the entire post global financial crisis (GFC) period!

Another aspect about the economic slowdown that needs to be examined is the contribution of the each of the following factors:

(a) The administrative, procedural and legislative changes like GST, IBC, UBI, RERA etc that are aimed at supporting higher growth in mid to long term but may have checked the growth momentum in the short term.

(b) The social policies of the government that are aimed at promoting national security and integrity but may have triggered an environment of mistrust and non-cooperation.

(d) The global trade slowdown due to trade wars, geopolitical tensions and uncertainty over Brexit etc.

(e) The cyclical global economic slowdown due to fatigue after long expansion period since GFC.

This exercise may help finding the right solutions and alleviating the atmosphere of despair and pessimism.

Tuesday, December 17, 2019

The Solution lies within

Some of the headlines in yesterday's newspapers made interesting reading:

A few days ago, the finance minister had categorically dismissed the talks about changes in the GST rates. She was quoted having said that "Buzz is everywhere other than in my office". Yesterday, West Bengal Finance Minister Amit Mitra, who is also former head of GST Council and FICCI General Secretary, reportedly, wrote to the finance minister requesting, “We should not in any way tinker with the rate structure or impose any new cess at a time when the industry and consumers are going through the most distressing times with ‘stagflation’ knocking at our door (stagnation accompanies by growing inflation).” (see here) It is very difficult for a common man to assimilate, how such a senior person would write an official request, if there is no buzz around.

The commerce minister highlighted that he has taken an exercise to consult country’s top 25 corporate houses and lenders, to assess their investment plans and also try and resolve their issues that they may be facing in their bid to expand operations. The list of 25 included Aditya Birla Group Chairman K. M. Birla, among others. (see here)

The telecom minister expressed his displeasure over the comments made by the promoters of beleaguered Vodafone-Idea, in which Birla group is co-promoter. Referring to the comments made by Vodafone CEO that running business in India may not be viable unless the government helps, the minister said, “I don’t appreciate this kind of statement. Very firmly and very clearly. We have given all the opening for doing business but no one should dictate terms on us. India is a sovereign country...,” It is pertinent to note that K. M. Birla has recently echoed the views of his British partner. (see here)

Reportedly, As many as 43 out of 85 coal blocks allotted after 2015 to PSUs have yet to receive 159 clearances, mostly because allottee PSUs have not taken necessary actions. These blocks were either auctioned or allotted to public sector companies by the government following cancellation of 204 blocks, including 33 operational blocks, by the Supreme Court in 2014. (see here) Incidentally, the incumbent commerce minister was in charge of coal ministry during May 2014 to May 2019.

India now ranks much lower than Bangladesh on many parameters, including GDP growth (8.15% in FY19). The latest is the gender gap. India is now ranked 112, down 4 places since last year, in terms of gender gap amid widening disparity in terms of women's health and survival and economic participation -- the two areas where the country is now ranked in the bottom-five. Political rhetoric and shenanigans apart, Muslim countries like Bangladesh (50th) and Indonesia (85th) are doing much better than us in bridging the gender gap. (see here)

The point is that the government is obdurately refusing to accept that the solution lies within. Instead of introspecting they are relying on "experts", "vested interests" and "uninterested" for solutions. Obviously, they would not get the appropriate answers.

Tuesday, December 3, 2019

Demonetization, GST major culprits for growth slowdown

As expected, the GDP growth data for 2QFY20 came out to be poor. In the quarter ended September 2019, India's real GDP grew 4.5% and GVA grew 4.3%, the lowest rate of growth in 6years. The latest economic growth rate of India is now lower than China, Indonesia, Myanmar, Vietnam, Philippines, and similar to Malaysia.

The supply side data explains that the slowdown is pervasive and all sectors of the economy are struggling. Industrial sector was stagnant with manufacturing recording its first quarterly contraction in a long time. Services grew less than 7%, the lowest pace in 2years. Despite above normal monsoon, the agriculture growth at 2.1% was also lowest for the second quarter of a fiscal in many years.

On the demand side, private consumption grew 5.1%, slightly better than 3.1% in 1QFY20, but dismal in comparison to historical trends. Investments grew barely at 1%. Both exports and imports contracted for the first time since 2016. Import contraction of 6.9% despite weaker rupee further highlights the poor demand conditions.

This poor GDP growth data was supported to a great extent by the government expenditure which grew at 11.6%, highest rate in 6 quarters. Given that the government has already surpassed its fiscal deficit target for FY20, the tax collections continue to be sluggish and the nominal GDP is slipping at a faster rate than real GDP, it would reasonable to assume that the slowdown may persist for few more quarters at the least.

Regardless of what the government spokespersons and some enthusiastic market analysts may say, it is highly likely that we may end up FY20 with sub 5% growth. Given the fiscal challenges and intensifying global slowdown and deflationary pressures, we may struggle to grow more than 6% in FY21 as well, despite lower rates, taxes, and base effect and improving credit availability.

Based on an informal survey of traders, SME and professional, I am inclined to conclude that this sub 5% growth trend may persist for at least next 3 to 4 quarters. The key feedback from the survey could be listed as follows:

(a) The growth rate shall slip further as the government continues to be in denial mode insofar as the most important cause of slow down is concerned.

(b) Most respondents highlighted that lingering effects of demonetization and serious faults in GST processes are reasons for the slowdown.

(c) Demonetization has hit the small businesses very hard. It has destroyed the traditional sources of short term financing for traders and small businesses, increased the working capital cycle, constricted the inventory holding and business expansion capacity and increased the cost of doing business. Many of these SME businesses were critical part of the supply chain of the larger businesses. It has therefore affected the larger businesses also indirectly. Poor business conditions for large number of small businesses have obviously impacted the employment and consumption demand conditions. There is nothing to suggest that these conditions shall correct on their own in near future.

(d) The implementation of GST has been hasty and seriously flawed. More than 75% of GST assesses must be facing problems of reconciliation, wrongful disallowance of credit, defaults, harassment, corruption, and/or delayed (or no) refunds. A careful examination indicates that the system is even more problematic and cumbersome than the erstwhile Excise, VAT and Sales Tax regime. Unless the GST system and processes are streamlined for seamless flow of credits and payments, any meaningful acceleration in growth rate looks highly improbable.

Friday, November 29, 2019

It's an economic emergency, almost

The economic data for 2QFY20 will be released today evening by the Central Statistics Office (CSO). There is a near consensus that this data may not be good. The estimates of various agencies and institutions are ranging between 4% to 4.8% growth in real GDP over 2QFY19 (vs. 5% in 1QFY20). 2QFY20 is expected to be the sixth straight quarter of decline in growth rate, the longest span of decline since 2011-2012.

Since this data belongs to the quarter ended September 2019 and the financial performance of the businesses for that quarter is already in the public domain, it is reasonable to assume that the financial markets have assimilated the poor growth numbers quite well. However, the growth estimates for corporate revenue and profit for 2HFY20 may not be factoring a negative surprise.

Going by the forecasts of most analysts and economists, the growth estimates of 2HFY20 are not very encouraging; though the consensus is expecting the second half of the year to be better than the first half. It is estimated that the measures taken by the government to stimulate the growth, lower lending and tax rates, likely bumper Kharif crop, low base effect, inventory rebuilding in key sectors like automobile, cement, steel etc., shall have positive impact on the 2HFY20 data. The overall FY20 growth is expected to be in the range of 5.4 to 5.8%, implying a growth rate of ~6.5% in 2HFY20.

The non-profit think National Council of Applied Economic Research (NCAER) recently released its mid-year review of India’s growth prospects. NCAER has presented the lowest estimates so far, forecasting that the economy will grow at just 4.9% in the financial year 2019-20.

India may therefore lose the claim of "fastest growing economy" in next six months. The statement made by the finance minister in the parliament on Wednesday clearly indicates that the government is not oblivious to this fact. That is perhaps why the finance minister changed the narrative from the usual "slow but still the fastest growing" to "slow but no recession" (see here).

A section of commentators is insisting that on ground the Indian economy may already be witnessing a shallow recession. (see here, here, and here)

Even if we ignore these rather pessimistic opinions, one thing is clear - the impact of slowdown is highly skewed. The lower and middle socio-economic strata, which consist of over 70% of the population is facing recession like conditions. This is adequately reflected in (i) consistently falling private consumption since 3QFY18; (ii) shrinking household savings and (iii) rising household debt. The rich who form less than 10% of the population are contributing more than 50% of the growth.

Under these circumstances, the economic policy response, in my view, must be non conventional. A gradual, piecemeal stimulation may not be effective in these circumstances, which in fact has been the case in past one year. The response has to be immediate, accelerated, and massive. The policy makers need to acknowledge the situation as an economic emergency and accordingly use exceptional methods.

For example, instead of caring excessively about the fiscal deficit at this point in time, the government must consider a classical Keynesian response. Similarly, the monetary policy response also needs to be dramatic. This incremental 25-35bps rate cuts may not bear the desired impact. A sharp rate cut 100-125bps with rationalization of USDINR and REER may be necessary. Negative real rates, competitive exports and incentive to borrow & invest.

The proposal to initiate a TRAP like program is welcome. But the bureaucracy must be sanitized to make sure that the effort must be "how the coverage of such an initiative could be maximized" rather than minimized as the case has been tax rate cuts and real estate rescue plan.