Some food for thought
"Render to Caesar the things that are Caesar's and to God
the things that are God's."
—Saint Ambrose (Italian saint, 339-397)
Word for the day
Gritty (adj)
Showing courage and determination
Mid-year review
Yesterday I highlighted how the markets have performed YTD 2019.
Let's check how the economy has been doingrecently.
Economic performance review
1. Economic
growth slows down considerably
GDP growth at 5.8% yoy for the quarter ended March 2019 was
lowest in 20qtrs. Consequently, GDP growth for FY19 was at 5yr low of 6.8% yoy.
The long term growth trajectory now appears flat. No major acceleration is
expected in next couple of years at least.
(i) Slow down in GDP
growth was led by deceleration in investments, manufacturing output and farm
sector growth.
(ii) Sharp cuts in
public non capital expenditure added to growth deceleration, highlighting the
constraints applied by poor growth in revenue collections.
(iii) Domestic savings
continued to contract.
(iv) Industrial
activity fell sharply in 4QFY19 due to poor demand conditions.
(v) Tepid automobile
sales numbers for the month of April and May and slowdown in core sector growth
in April 2019 2.6% (vs 4.6% yoy) due to negative growth in crude oil, natural
gas and fertilizer output further suggests that 1QFY20 GDP number may also not
be encouraging.
(vi) Actual GDP
growth has remained below potential for more than 6 years now.
2. Fiscal
improvement stagnating, real rates at all time high
The fiscal improvement is stagnating at much higher level then
what may be desirable.
(i) The combined
gross fiscal deficit of center and states is sustaining above 6% of GDP despite
strong resolve of central government to meet FRBMA targets.
(ii) It is crowding
out public investment in building social and physical infrastructure, as well
as private investments as real rates are sustaining at all time high level.
(iii) Despite 150bps
cut in policy rates in past one year, the real rates (Repo rate minus CPI) are
still running high, impeding growth.
(iv) As per a
research report by Elara Securities, in past five years "the reduced
fiscal space due to continued shortfall on tax revenue receipts has compelled
the government to move a significant part of its expenditure to public sector
enterprises. The combination of high government borrowing along with
off-balance sheet borrowing programs could further squeeze the space available
for private borrowers and NBFC." Besides, the government's decision to use
small savings instead of market borrowing to fund the deficit may keep pressure
on lending rates, as banks are forced to keep the deposit rates higher to
compete with small saving funds.
3. External
vulnerability rises a tad
India's external vulnerability has risen a tad in past one year.
Though not at alarming level, a sharp rise in oil prices or further slowdown in
export demand could raise concerns.
(i) India's external debt to GDP ratio has risen
to the pre global financial crisis level in FY19.
(ii) Forex reserve to total external debt is much
lower than 2009 level.
(iii) Current account deficit is at five year high.
(iv) Capital flows have slowed down
(v) INR remains slightly overvalued gaining against
most currency in past three months.
4. Household stress rising
Household stress
has been rising for past couple of years, as reflected in slowing household
savings rate, poor consumption growth numbers, and material rise in household
debt.
(i) Personal consumption growth has continued to
moderate for past few quarters.
(ii) Household debt has risen to 11% of GDP,
highest ever.
(iii) In quarter ended March 2019, personal and
consumer loans (including gold mortgages) were the only categories of loans recording
growth, rather ominous one.
5. Corporate debt burden rising
The corporate
debt levels have also risen sharply in past three years, impacting the business
confidence and capex growth.
6. Gross NPA witness improvement, as IBC
process stabilizing
(i) By end of FY19, over 700 cases had been resolved under
the IBC process. In FY19 alone lenders realized ~Rs660bn from the resolved
cases. It is estimated that the recoveries may exceed Rs800bn in the current
year FY20. In 4QFY19 about
350 new cases have been filed for resolution under IBC.
(ii) NPA in the banking system had peaked at 11.5 per cent
in March 2018 and then declined to 9.3 per cent in March 2019. As per a recent
CRISIL report "Asset quality of banks should witness a decisive turnaround
this fiscal (FY20) with gross NPAs reducing by 350 basis points (bps) over two
years to around 8 per cent by March 2020. This will be driven by a combination
of reduction in fresh accretions to NPA as
well as stepped up recoveries from existing NPA accounts".
7. Monsoon delayed, expected to pick up
The South West
Monsoon that brings most of the rains to India and is considered critical for
farm and construction sector growth, has arrived 3weeks late this year.
However, as the El Nino impact has waned considerably, it is expected to gather
some pace in coming weeks. IMD still is confident of achieving 96% of normal
rains this season. (see
here)
8. Inflation remains benign, but signs of
bottoming out
CPI inflation has
remained benign for past 6months. However, in recent weeks food inflation has
picked up (due to monsoon delay), and is out of deflationary trend.
Nonetheless, overall inflation remains within RBI tolerance limit and is not an
imediment to growth.
9. Rates have eased, liquidity begins to
improve
Monetary Policy
Committee (MPC) of RBI has changed its policy stance to accommodative from
neutral. This indicates that the rate cut cycle that started last year may
continue well into the future, as the growth forecast for FY20 has been cut and
economic activity has cooled down materially.
System wide
liquidity has moved to surplus in June.
Globally also,
most central bankers are now accommodative and willing to ease should economic
conditions deteriorate any further.
10. GST collections showing signs of
improvement
GST collection
have remained below the budgeted level, but showing signs of stabilizing above
Rs1trn/month now.
11. Global trade collapses
Global trade had
tumbled to levels last seen during the financial crisis depression. The Sino-US
trade conflicts are making it only worse.
(i) Exports to the world is presently weakest
since 2009.
(ii) Exports to advances economies are also lowest
since 2009.
(iii) Exports to the European Union are close to
2009 lows.
12. Global growth slowing down
There are
distinct signs of global growth slowing down across developed and emerging
markets.
(i) US GDP growth is expected to slow down to
2.4% in 2019 and 1.6% in 2020 from 2.9% in 2018.
(ii) Euro Area growth may likely slow to 1.2% in
2019 from 1.8% in 2018.
(iii) The global growth engine for past one decade,
Chinese economic growth is likely to slow down to close to 6% in 2019 from 6.6%
in 2018.
Economic performance in pictures
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..to continue tomorrow
