NCAER’s Quarterly Review of the Economy, Q2:2020-21in Coronavirus times

Sudipto Mundle, Bornali Bhandari, Rudrani Bhattacharyawith Ashima Goyal and Pranjul Bhandari

in conversation withShekhar Shah

Webinar, Friday, September 25, 2020, 6:30 pm IST

Coronavirus Briefing

Phot

o: V

ijay P

ande

y

2

QRE Team

Team Members

Sudipto Mundle, Bornali Bhandari, Rudrani Bhattacharya (NIPFP), Pallavi Choudhuri, Anil K Sharma, Saurabh Bandyopadhyay and Ajaya K Sahu

Organisational SupportSudesh Bala, Praveen Sachdeva, Shilpi Tripathi, Sangita Chaudhary, Sukriti Chauhan, Eman Rahman and Khushvinder Kaur

3

Outline

I. Hysteresis and the Quarterly, Annual, and Medium-to-Long Term Growth Outlook

II. Performance of the Real Economy and TradeA. Domestic Real Sector TrendsB. External SectorC. Price Trends

III.Macroeconomic PoliciesA. Grim Fiscal Outlook 2020-21B. Monetary Policy Challenges

4

Coronavirus Pandemic still raging

4Source: MoHFW.

-120-100-80-60-40-20020406080

0

200

400

600

800

1,000

1,200

1,400

7-da

y M

A o

f Gro

wth

Rat

e of

Dai

ily D

eath

s

7-D

ay M

A o

f Num

ber

of D

aily

Dea

ths

7-day MA of Daily Deaths (Numbers) and 7-Day MA of Growth Rate of Daily Deaths (%)March 10, 2020 to September 22, 2020

7-day MA of Daily Deaths 7-day MA of Growth Rate of Daily Deaths

2,003

• Over 1,000 daily deaths, growing at 1% daily• Total deaths now over 90,000

5

Economy in an unprecedented crisis

• GDP in Q1: 2020-21 contracted by 23.9% year-on-year (y-o-y).

• Contraction moderating but y-o-y growth still negative

.

-12.7

-8.6-6.2

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Rea

l GD

P, %

cha

nge

y-o

-y

GDP growth actual, nowcast and forecastQ4: 2018-19 to Q4: 2020-21 (% change y-o-y)

GDP growth actual GDP growth nowcast/forecast

-23.9

6

Economy in an unprecedented crisis• Growth forecast for 2020-21: (-) 12.6%

• Unfortunately, projected annual inflation also elevated at 6.5%, above RBI target band

• Competing goals of reviving growth vs containing inflation, macroeconomic policy challenging

.

-12.6-15.0

-10.0

-5.0

0.0

5.0

10.0

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

Rea

l GD

P (%

cha

nge

y-o-

y)

Annual GDP Growth, actual and forecast 2012-13 to 2020-21 (% change y-o-y)

Actual Forecast

7

Hysteresis: medium to long-term impact of shock • Path I: Counterfactual trend growth path (5.8%) with no shock• Path II: Assumed optimistic 7% growth path post 2021

– Previous peak output (2019-20) will be reached only in 2022-23– Catch-up with counterfactual 5.8% growth path only by 2037-38

• Path III: Trend growth path (5.8%) after reaching peak output in 2022-23• 1991-type wide ranging reforms necessary to nudge economy to higher growth path

.

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

Rea

l GD

P (R

scr

ore)

Simulated Paths of Medium to Long-term Growth

Path 1(5.8% growth)

Path 3(7% growth till 22-23 & 5.8% thereafter)

Path 2( 7% growth)

2022-23

2037-38

8

Sustained decline in GDP Growth since Q3: 2017-18 before coronavirus crisis

8.3

4.2

8.7

3.1

-23.9-28.0

-24.0

-20.0

-16.0

-12.0

-8.0

-4.0

0.0

4.0

8.0

12.0

% c

hang

eReal GDP Growth

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSOLegend: _ Annual; _ Quarterly.Source: MoSPI and NCAER Estimates.

9

Forecast of normal South-west monsoon augurs well for Indian agriculture

3

16

-16.0

30

8

-20

-10

0

10

20

30

40

50

Eastern Region WesternRegion

NorthernRegion

SouthernRegion

All India

% D

epar

ture

of A

ctua

l fro

m N

orm

alSub-division wise Rainfall Distribution (June 1, 2020 to 23rd September, 2020)

June June-July June – August* June-23rd SeptemberNote: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: IMD

10

Steep Decline in Industrial Growth since Q4: 2017-18

9.6

0.9

-0.6

-38.1-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0%

cha

nge

Growth in Industry GVA

Legend: Annual; Quarterly.Source: MoSPI and NCAER Estimates.

IIP confirms moderating contraction in July 2020

2.5 4.8-5.7

3.8

-66.6

-11.1

3.2 4.9

-6.6

-57.3

-10.4

-70.0-60.0-50.0-40.0-30.0-20.0-10.0

0.0

% y

-o-y

cha

nge

IIP General and IIP Manufacturing (%y-o-y)

IIP General IIP Manufacturing

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: MoSPI

12

Sharp decline in services growth projected for 2020-21

9.45.5

8.7

-20.6-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

% c

hang

e

Growth in GVA Services

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Legend: Annual; Quarterly Source: MoSPI and NCAER Estimates

13

Cargo traffic has shown relatively lower rates of contraction compared to passenger traffic

Revenue Earning Goods Traffic, Cargo Handled at Major Ports and Cargo

Aviation Traffic

-35.3

3.9

-23.3-10.3

-82.8

-29.4

-90.0-80.0-70.0-60.0-50.0-40.0-30.0-20.0-10.0

0.010.0

2019

: Apr

ilM

ayJu

neJu

lyA

ugus

tSe

ptem

ber

Oct

ober

Nov

embe

rD

ecem

ber

2020

: Jan

uary

Febr

uary

Mar

chA

pril

May

June

July

Aug

ust

% y

-o-y

cha

nge

Revenue earning goods traffic

Cargo handled at major ports

Cargo Aviation

Air Passenger and Railways Passenger Traffic

7.12

-99.8

-78.60

4.5

-101.2

-96.8

-110.00-100.00-90.00-80.00-70.00-60.00-50.00-40.00-30.00-20.00-10.00

0.0010.00

2019

: Apr

ilM

ayJu

neJu

lyA

ugus

tSe

ptem

ber

Oct

ober

Nov

embe

rD

ecem

ber

2020

: Jan

uary

Febr

uary

Mar

chA

pril

May

June

July

Aug

ust

% y

-o-y

cha

nge

Air Passengers Railways Passengers

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: Ministry of Railways, Indian Ports Association and Airports Authority of India.

14

Exports and imports growth declining since Q2: 2018-19, now negative

-39.3-9.7

-50.0

-23.3

-60.0-50.0-40.0-30.0-20.0-10.0

0.010.0

% y

-o-y

cha

nge

Growth of Exports and Imports of Goods & Services (US$ terms, %y-o-y)

Exports of Goods & Services Imports of Goods and Services

Source: Ministry of Commerce and RBI.

Increase in foreign currency assets & exchange rate movements

498

65.00

67.00

69.00

71.00

73.00

75.00

77.00

79.00

350

400

450

500Ju

lyA

ugus

tSe

ptem

ber

Oct

ober

Nov

embe

rD

ecem

ber

2020

: Jan

uary

Febr

uary

Mar

chA

pril

May

June

July

Aug

ust

Rs

per

US$

US$

bill

ion

Foreign Currency Assets (US$ billion)Exchange Rate (Rs per US$)

111

112

113

114

115

116

117

118

119

120

64

66

68

70

72

74

76

78

RE

ER

Rs

per

US$

Exchange Rate (Rs per US$)

REER (36 country, trade weighted) 2004-05 base

Real

15

Nominal

16

Inflation trends and forecast

Source: Contributed by Rudrani Bhattacharya

4.86.2 6.6 6.4 6.4

0

2

4

6

8

10

12

Infla

tion

(%y-

o-y)

Unrealistic revenue projections

15.0

20.0

25.0

Tax

Rev

enue

(Rs

lakh

cro

res)

Tax Revenue Actuals and Projections

2018-19 2019-20 (BE) 2019-20 (PA) 2020-21

(+) 18.3%

(-) 18.3%

(+) 20.6%

Actuals/Provisional Actuals Revenue

Budget Projections

• 2019-20 BE assumed 18.3% tax revenue growth

• Actual 2019-20 tax receipts (provisional) was (-) 18.3% compared to 2019-20 BE

• Despite this 2020-21 BE assumed 20.6% tax revenue growth

17

Sharp slide in tax revenue following lockdown

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Tax Revenue Direct Taxes Indirect Taxes Central GST

Tax

Rev

enue

(Rs

lakh

cro

res)

Tax Revenue, April-July (2019 and 2020)

(-) 29.5%

(-) 33.2%

(-) 27%

2019, April-July 2020, April-July

(-) 34%

• Lockdown has led to a sharp contraction in economic activities.

• This in turn has led to a large reduction in tax revenues of about 30% in April-July 2020 year-on-year.

• Direct taxes, indirect taxes & its largest single component, GST, have all declined significantly.

Revenue decline has not been passed on as expenditure compression

0.0

5.0

10.0

15.0

Total Receipts Expenditure Deficit

Rs

lakh

cro

res

Receipts, Expenditure and Deficits

(-) 42%

(+) 11.3%

(+) 50%

April-July 2020April-July 2019

• Central government revenue receipts declined by 42% during April-July 2020 (y-o-y).

• Revenue decline has not been passed on as expenditure contraction.

• Expenditure increased by 11.3% during April-July 2020 (y-o-y).

• Revenue decline has been absorbed by a 50% increase (y-o-y) in the fiscal deficit during April-July 2020.

19

Fiscal Stimulus and Fiscal Impulse (2020-21)

• Low fiscal component of Atmanirbhar Bharat (2.4% of GDP) was misleading

• Expected fiscal deficit in 2020-21 is 12.8% of GDP, up from 6.3% last year

• The public sector borrowing requirement is expected to be around 14%-15% of GDP (2020-21).

• This amounts to a large fiscal stimulus

• Even the fiscal impulse will be large at 6.5% of GDP for 2020-21.

20

Item GDP (%)

1 2

1 Central Government Budget Deficit 3.5

2 Post-Budget additional borrowing 2.1

3 Atmanirbhar Bharat fiscal component 2.4

4 States’ Budget Deficit 2.8

5 Additional borrowing headroom for States 2.0

6 Combined fiscal deficit 2020-21 12.8

21

Challenging monetary policy task

• Competing policy goals of reviving economy & containing inflation while pandemic still raging

• Reviving economic activity is the priority since GDP contracted by 23.9% in Q1

• However, headline inflation at 6.7% now above RBI’s target band

• Given this context, liquidity infusion of 4.8% of GDP provided by RBI in addition to fiscal stimulus

• Repo rate also reduced from 5.2% in February 2020 to 4% in May 2020.

• Repo rate reduction subsequently paused because of elevated inflation

• Inflation containment will mainly require strengthening of supply responses

21

Improved transmission of Repo rate changes

• The transmission of reduction in Repo rate has improved

• Weighted average lending rate of commercial banks has declined by 0.9% since February

• Transmission has been strongest for foreign banks (-1.4%), followed by private sector banks (-1.1%)

• Transmission has been weaker for public sector banks at only 0.7%

22

Source: RBI

9.4

10.2

8.68.9

8.59.1

7.2

8.2

5

6

7

8

9

10

11

ScheduledCommercial

Banks

PrivateSector Banks

ForeignBanks

Public SectorBanks

Weighted average lending rate for fresh loans, January and July 2020

Jan-20 Jul-20

Source: RBI

Improved transmission of Repo rate changes

• Yield on short maturity government bonds have also followed Repo rate reductions

• However, yield on the benchmark 10-year G-sec has remained elevated.

• RBI has taken several steps to moderate the G-sec yield such as TLTRO, Twist Operations etc.

• However, these have not proved very effective so far

• This is mainly attributable to crowding out by massive government borrowing following economic contraction

23

3

4

5

6

7

Rates and Yields, % (January to August 2020)

Policy Repo Rate Reverse Repo Rate91-Day T-Bill (Primary) Yield 364-Day T-Bill (Primary) Yield10-Year G-Sec Par Yield (FBIL)

24

Credit growth has declined further in 2020

24Source: RBI

8.46.6

1.9 1.6

7.7

13.815.9

8.7

2.4 2.2

-3.7

-9.0

3.7

10.7 10.5

1.9

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Micro & Small Medium Large

Ag & Allied Industry Industry Services Personal Priority

Growth Rate of Credit Across Industry (%, y-o-y)

21-06-19 19-06-20

• Credit growth has declined for all sectors in 2020, turned negative for micro, small and medium industries.

• This is despite several credit guarantee schemes provided under Atmanirbhar Bharat programme to reduce risk aversion.

• Lenders prefer low return but also low risk government sovereign debt, MSME businesses also reluctant to borrow

• Situation may not improve so long as crowding out by large government borrowing persists

25

Financial Sector Stability and Reforms

• Financial sector already under stress prior to lockdown, with Gross Non-performing Assets (GNPA) 8.5% in March 2020

• Financial Stability Report indicates stress levels have considerably aggravated since the lockdown

• Stress tests covering 53 commercial banks indicate – GNPA could spike to 14.7% under ‘very severe’ stress– GNPA could spike to 12.5% under ‘moderate’ stress

• In the short-term monetization of at least a part of massive government borrowing could reduce crowding out and enhance credit flow to the private sector

• However, urgent reforms are required to strengthen financial stability and the health of the financial sector in the long-term. Key reform measures would include:

– Strengthened supervision of banks – Establishment of a ‘bad bank’ to acquire NPAs and clean up bank balance sheets– Governance reform in public sector banks, reduction of government ownership to less than fifty per cent before

recapitalization of these banks

25

Thank You!