Why Indian economy is grappling with several problems on the recovery path? while Unlock 3.0 in progress. Though the economic activity including industrial production has been picking up from bottom level touched in April, still it’s a long way for the third largest economy in Asia to move on to reach pre-Covid level. Contrary to the positive indications from the central government on economic recovery, other parameters don’t hold the view of the government on rebooting of economic activity. The official data collection mechanism is totally not in force and this has limited the process of getting authentic data from several industry verticals to ascertain the capacity utilisation in the India Inc and business activity across the country, observe economists, who predict the real recovery in 2021 and total rebound in 2022. However, this is subject to the availability of vaccine for Covid-19 pandemic. Moreover, the damage will be long lasting, they opine.
India’s real GVA (gross value added) contracted 7.0 per cent YoY in June 2020, its fourth successive decline, which implies that economic activity shrank 18.7 per cent YoY in 1QFY21. According to CMIE study, India lost 12.2 crore jobs in domestic economy and unemployment rate rose to 27 per cent from March onwards.
“Whatever recovery or economic growth the government claims, it fails to create any employment for the youth. The jobless growth will be another problem for the economy. We expect consumer demand recovery in December quarter and rebound in 2022,” said an economist.
Indian economy grew 3.1 per cent in Jan-March quarter of 2020. Average growth for FY21 is projected to be negative (-)4.8 per cent and two-digit contraction in the second quarter (April-June) of the current fiscal.
The footfalls at retail stores still down 90 per cent in June when compared with the previous corresponding month. However, retail stores are witnessing revival of business from June onwards when compared with April and May.
Coming to lending activity in the domestic banking sector, the bank deposit growth is higher than loans in April, May and June. According to RBI, for every Rs100 deposited in banks, lending was to the tune of Rs74. This is 77 per cent lower than that in March. The declining loans-to-deposits ratio is clearly indicating drop in credit demand and banks’ risk aversion to lend during the Covid-19 outbreak.
“Several surveys contradict with each other on industrial and commercial activity. Because most of the reports were not based on field surveys as the country is still under lockdown amid ongoing curbs on containment zones, which account for 70 per cent of industrial areas,” said a market analyst.
Domestic consumption accounts for 58 per cent of GDP. India Inc is suffering the most from sluggish consumption demand, which is yet to revive.
“The much publicised $266-bn stimulus package is not delivering the desired results so far. The package is meant for credit support to MSMEs, which can restart their business and are suffering from lack of demand in the market. Moreover, majority of MSMEs have not recovered properly from the jolt of demonetisation and GST. And rubbing salt into wounds, Covid-19 pandemic is taking a toll on them,” said a representative from Hyderabad-based industry body.
So, what economic indicators are holding real picture for economy rebooting? Let’s take a look at the latest Google’s mobility trends based on high frequency indicators. The Oxford Stringency index collects data for 17 indicators. Eight indicators are pertaining to containment and closure policies including schools closure and restrictions in containment zones.
Four indicators on economic policies, income support to citizens and five indicators on health system policies. The overall Oxford Stringency index showed pickup in May and declined marginally in early June and then has been continuing flat at 76 points level. Another benchmark for measuring economic activity is power consumption.
According to the data from Ministry of Power, the demand was flat during week ended June 28. On average, the power demand rose over 15 per cent in April and 20 per cent in May and 50 per cent in June when compared with consumption level in March. This is confirming the improving situation of economic activity in the country since Unlock 1.0 announced unlock 1.0 on May 31 after the Lockdown 4.0 ended on May 31 (Sunday). However, it’s flat in July. Now, let’s’ see what the Centre is claiming?
Centre keen on reforms
The Union Finance Minister Nirmala Sitharaman says that economic ‘green shoots’ are clearly visible in the present scenario. Further steps might be initiated by the Centre to sustain the economic revival process. The Centre is monitoring the situation closely from time to time.
Further, the FM gave examples of rising power consumption, toll collection, bank transactions and improvements in PMI index as indicators of ‘green shoots’ in the economy. Besides, Sitharaman said that agriculture is driving the revival of the rural economy.
Despite these ‘green shoots’, the central government keeps all options open and intervention can happen even in the future, looking at how the industry responds.
Elaborating on the government’s stimulus measures, the FM said that it gave 10 per cent of GDP, which made a lot of difference for the companies, which wanted to come out of the lockdown and the effects of the lockdown.
Furthermore, she pointed out that several structural reforms were announced during the pandemic. Major reforms decisions stuck for decades, including opening up of agriculture, were taken, she noted. The Centre is working on ‘Labour Codes’ and will require the Parliament’s approval.
What’s think tank suggesting?
Contrary to what the central government says, suggestions from NITI Aayog further hold the view of sluggish economy growth. NITI Aayog predicted that India’s GDP may contract around 5.1 per cent in the current fiscal. Considering the contracting GDP, NITI Aayog has suggested ways to boost demand in the country.
The think tank has submitted its presentation to Prime Minister Narendra Modi and the Finance Ministry, on ways to boost demand, specifically in the key sectors of automobiles and real estate.
As per NITI Aayog, the long-awaited scrappage policy should be brought in to help the automobile sector. It has also recommended removal of Cess on automobiles.
In a bid to revive demand in the realty sector, it has suggested reinstatement of the subvention scheme, which was disallowed last year. Further, the think tank has also recommended more government spending as private expenditure and investment is likely to take a backseat in the current scenario.
NITI Aayog, in its presentation, also noted that manufacturing sector growth and capacity utilisation was severely low even before the nationwide lockdown was implemented.
Rebooting Indian economy
Prime Minister Narendra Modi-led government is upbeat over rebooting of economy during Unlock 3.0. The NDA government says that it’s revamping the Indian economy to make it the global centre of the supply chain in accordance to the shift in the international geo-politics.
In an interactive session with the PHD Chamber of Commerce and Industry, Ministry of External Affairs Secretary, Economic Relations (ER), Rahul Chhabra, spoke on ‘Role of Indian Economic Diplomacy in Making India Self Reliant.’
Chhabra said: “Globally there has been a shift in terms of geo-economics, politics and strategy. The Government of India is looking at these changes in an optimistic way by re-booting and revamping the economy. The government is trying to increase the demand and the income of small farmers. There is a focus on MSMEs and enhancing public partnership and being self-reliant. We are trying to turn inwards but trying to make ourselves the global centre of the supply chain.”
India’s commercial diplomacy is based on transparency, fairness, equity, dispute and justice. India is trying to develop self-reliance and a strong economy at the same time to regionalise the supply chains and indigenise them in a structured manner.
He further suggested that key sectors such as textiles, gems, jewelry, chemicals and pharma, where India should focus upon. There’s need to develop capabilities in electronics, engineering, design, and others.
“We are trying to be the global pharmacy hub by sending medicines and devices to several countries around the world. We need to expand ourselves in human capabilities in the long run,” he said. The secretary said FDI needs to be promoted, adding that India has to be an alternative and reliable country for low-cost manufacturing.
Talking about energy security, he said that India's engagement with the International Solar Alliance is currently being restricted to the countries near the tropical. “But we have to universalise it,” he said. On the International Energy Agency (IEA), India, he said, has a current association status which needs to be upgraded through partnerships in the future.
Over the last five years, India has given over 300 Line of Credit (LoC) projects worth millions of dollars to many countries. The government, he said, was trying to allow Indian companies to open up in new countries and showcase clear expertise in project planning, design and execution. The regional and cross border connectivity under these projects is a force multiplier, ensuring the seamless flow of goods that are opening upmarket to neighbourhoods.
Debt-to-GDP ratio rising to 88%
The Covid-19 has been creating tremors across India as the economic turbulence may push debt-to-GDP ratio further higher. Latest report from SBI Ecowrap says that together with the declining GDP growth, debt-to-GDP ratio has been adversely affected in all countries.
“India’s debt-to-GDP ratio has increased gradually from Rs 58.8 lakh crore (67.4 per cent of GDP) in FY12 to Rs 146.9 lakh crore (72.2 per cent of GDP) in FY20. Higher borrowing this fiscal was likely to increase the gross debt to around Rs 170 lakh crore (87.6 per cent of GDP).
External debt is estimated to increase to Rs 6.8 lakh crore (3.5 per cent of GDP) in the expected gross debt for FY21,” said the report.
“Of the remaining domestic debt, component of state’s debt is expected at 27 per cent of GDP. Interestingly, the GDP collapse is pushing up the debt-to-GDP ratio by at least four per cent, implying that growth rather than continued fiscal conservatism is the only mantra to get us back on track,” it said.
“We reiterate the current thinking of rating downgrade in policy circles is a false negative as India's rating is likely to face a litmus test of downgrade in FY21, depending on what we have done to bring growth back to track,” the SBI Ecowrap report said.
This higher debt amount will also lead to shifting of the FRBM target of combined debt to 60 per cent of GDP by FY23 by seven years with the target now seem achievable in FY30 only.
The moot point is the sustainability of the debt. The research study is of positive view of the current foreign exchange reserves as it’s sufficient to meet any external debt obligations. On the internal debt, since most debt is domestically owned, its servicing is not an issue, it said.
“In the current situation, our nominal GDP growth is likely to contract significantly and based on this our interest-growth differential will turn positive in FY21, thus raising serious questions on debt sustainability,” the SBI Ecowrap report said.
Fiscal deficit at 83.2% of budgetary target
The budgetary fiscal deficit for the April-June quarter of 2020-21 fiscal stood at Rs 6.62 lakh crore, or 83.2 per cent of the budget estimates (BE), according to data from Controller General of Accounts (CGA). The 2020-21 deficit has been pegged at Rs 7.96 lakh crore, as compared to the revised deficit of Rs 7.66 lakh crore for the last fiscal.
Fiscal deficit is the difference between revenue and expenditure. Economists forecast that the India’s fiscal deficit may surge to Rs 13 trillion in FY2021 from the budgeted level of Rs 8 trillion. The forecast was based on the fiscal support announced by the Narendra Modi sarkar under the ‘Aatma Nirbhar Bharat Abhiyan’ and the expenditure management measures that have been put in place, which could result in moderate compression in expenditure.
As per the CGA data, the fiscal deficit during the corresponding months of the previous fiscal was 61.4 per cent of that year’s target. The Central government’s total expenditure stood at Rs 8.15 lakh crore (26.8 per cent of BE) while total receipts were Rs 1.53 lakh crore (6.8 per cent of BE). Furthermore, the CGA data, showed that net tax revenue during the period under review was Rs 1.34 lakh crore, or 8.2 per cent of the budget estimated target.
The total receipts -- from revenue and non-debt capital -- during the fiscal 's first quarter (April-June) were Rs 1.50 lakh crore, or at 7.4 per cent of the estimates for the current financial year. The revenue deficit during the period under review was over Rs 5.77 lakh crore, or 94.8 per cent, of the estimates.
The net tax revenues of the Centre, non-tax revenues and disinvestment proceeds together may trail the budgeted level by more than Rs 6 trillion, highlighting the extent of the revenue shock being faced by the government.
Oil bill may dip 40% in FY21
There’s a sigh of relief for India when it comes to the oil sector. The sluggish demand in the domestic economy helped India save a lot on oil imports. Yes, the global health emergency caused by Covid-19 is coming to India’s advantage. Further, drop in global crude prices is also helping India in reducing sharply the import bill.
It’s estimated that a $1 fall in crude oil prices helps India reduce import bill by almost Rs 2,900 crore, while one rupee fall in value of the currency against dollar raises spending by around Rs 2,700 crore. The oil import bill may fall below $100 billion this year as Covid-19 and its continuity may have further dented the oil market. It could bring down the country's oil purchase bill sharply.
As the country entered lockdown phase since March 25, 2020, India’s oil imports fell about 29 per cent (YoY) to around 13.44 million tonnes in June, the lowest since October 2011. In value terms, the June oil imports stood at $4.93 billion (Rs 37,341.70 crore), down 55.29 per cent in the dollar terms from $11.03 billion (Rs 76,586.73 crore) in June 2019.
According to a latest IANS report, in April, it fell to 16.55 million tonnes, a 16 per cent YoY decline, from 17.28 million tonnes reported earlier. In May, crude oil imports fell 22.6 per cent, the biggest drop since at least 2005, to 14.61 million tonnes against the year-ago month.
If the trend continues, crude oil imports in FY21 may fall to 180 million tonnes, 50 million tonnes lower than 227 million tonnes imported in FY20. At current prices, the value of this 50 million tonnes will be around $20 billion.
Moreover, India may further reduce its oil import bill with crude oil prices remaining low or range-bound around $35-45 a barrel in FY21.
Assuming $40 a barrel average crude oil price and the rupee-dollar rate holding closer to current levels, and monthly imports remaining low at 15 million tonnes (average), for FY21, the import bill could slip to 60 per cent of the last year’s $60-65 billion. Similar level of import bill was witnessed in FY16 when crude had fallen to $26 a barrel for some time.
The writer is a business journalist with 27 years of experience