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NCAER’s Quarterly Review of the Economy

Quarter 3, 2015–16

The NCAER QRE team presented its quarterly review & forecast of the major macroeconomic variables based on NCAER’s modelling work. It included NCAER’s observations, reviews and projections for 2016-17 covering various sectors including agriculture; industry and services; public finance, money; credit and finance; external sector as well as the GDP forecasts. On this occasion NCAER released its widely-reported Quarterly Review of the Economy or QRE as it is popularly known.

Key Highlights

NCAER’s annual model predicts that GDP growth rate (GDP market prices at 2011–12 prices) will grow at 7.4 per cent for 2015–16 and 2016–17

NCAER’s annual model for GDP Market prices at 2011–12 prices forecasts GDP growth rate for 2016–17 at 7.4 per cent. The quarterly model suggests that Gross Value Added at Basic Prices (2011–12) will grow at 7.2 per cent for 2015–16 and 2016–17.

The prospects for agricultural sector in 2015–16 remain weak owing to poor monsoon rainfall for the second year in a row. Agricultural growth during the first half of the current financial year reduced to 2.0 per cent from 2.4 per cent growth witnessed in the first half of 2014–15. NCAER estimates, however suggest that Rabi output may perform comparable to previous year and the overall food grain output for this year may be marginally higher, approximately 1 per cent to 2 per cent.

Index of Industrial Production (IIP) contracted sharply in November 2015, with the index declining 3.2%, down from a five-year high of 9.8% in October 2015 and a growth of 3.8% in the comparable period last year. Manufacturing sector, accounting for 75 per cent of the total industry, became the biggest contributor to the fall in industrial growth with the manufacturing IIP witnessing a steep fall of (–) 4.4 per cent in November 2015. Nonetheless, the cumulative industrial growth during April–November period in FY16 (fiscal year 2015–16) stood at a decent 3.8% (Figure I.1), comfortably outpacing the growth seen during the same period for the last three years

The leading indicators of services sector present mixed signals in the first three quarters of current fiscal. Growth of tourist arrivals dipped on a y-o-y basis (5.5%) during third quarter of the current fiscal compared to growth of (6.5%) in the second quarter. The growth of banking indicators have been mixed with lower growth in aggregate deposits and higher growth in bank credit to the commercial sector. The third quarter growth of Revenue earning goods traffic by railways declined to 0.2 per cent compared to 1.5 per cent rise in earlier quarter. The growth in Cargo handled at major ports dipped and domestic aviation cargo traffic has also dipped. The domestic aviation sector picked up growth momentum in passenger segments during April–November of current fiscal.

The external sector persisted on a dismal trend during April–November 2015–16. Exports decreased by 18.1 per cent and touched US$ 196.6 billion given the subdued global demand. The steepest decline was posted by export of petroleum products (51.7 per cent) followed by ores and minerals (22.5 per cent) and agricultural products (20.5 per cent). Manufactured goods exports fell by 7.9 per cent on the whole, with transport equipment and engineering goods registering the highest decline of 17.9 and 15.6 per cent, respectively. Total imports declined by 15.9 per cent to US$ 447.5 billion, mainly on account of a 41.6 per cent fall in the value of oil imports. Non-oil imports too fell by 3.1 per cent.

Inflation rates have seen an increase over the last quarter (October –December 2015), mainly driven by the increase in food prices. The headline inflation rate calculated from the Consumer Price Index (CPI) jumped from 4.5 per cent in 2015–16:Q2 to 5.5 per cent in 2015–16:Q31. The outlook suggests that price movement would be contingent upon monsoon, global commodity prices and expectations of the households.

Fiscal Front which was 68.1 per cent of the Budget Estimate (BE) 2015-16 till September, 2015 increased to 87 per cent by November 2015 but is still well below the number (98.9) for the comparable period last year.

Battling extremes of drought and, unseasonal rains, complicated now by a warm winter, the Indian farmer had a difficult year in 2015 and his prospects are unlikely to improve in 2016. This has resulted in farmer distress and may lead to a decline in food-grain output in 2016 for the second straight year, says NCAER’s latest report on the short-term agricultural outlook for the 2016 rabi season released today. The NCAER 2016 Rabi Report estimates growth in agriculture and allied sector gross value added in the second quarter of FY 2015-16 to be 2.2 per cent, as compared to 1.9 per cent in first quarter. Overall, agricultural growth in 2015-16 is likely to be moderate at best, and is expected to remain unchanged from the 2014-15 growth rate of 0.2 per cent. The NCAER report also throws light on the scenario for prices of major food articles (primary articles like vegetables, fruits, and cereals) predicting higher inflation in the next 3-4 months, while prices remain moderate for manufactured or processed food products (such as dairy, edible oil, and grain mill).

These and other findings were discussed today at a national workshop on the Indian Agricultural Outlook: the 2016 Rabi Season and Medium-term Prospects. The findings come from ongoing research at NCAER, the National Council of Applied Economic Research in New Delhi that is supported by the National Food Security Mission of the Ministry of Agriculture & Farmers Welfare. It is also been supported by the UN’s Food and Agricultural Organisation.

Smt. Sangeeta Verma, Economic and Statistical Adviser in the Directorate of Economics and Statistics in the Ministry of Agriculture, in releasing the NCAER Rabi Report today noted that “The Government is taking the challenges facing the agricultural sector, particularly farmers, very seriously. It has initiated a string of measures to tackle these challenges. These measures include the launching of an e-marketing portal for farmers, promotion of irrigation schemes at various levels that replicate successful schemes at the state level, and the launch of a comprehensive national crop insurance program.” She noted the Government’s concern about the high and rising prices of pulses, and emphasized that “this necessitates extensive agricultural research done in an academically robust and professional manner.” She mentioned that these issues are under intense discussion in the Government.

The workshop offered an important opportunity for the Indian policy and economic research community to discuss agricultural policies in ways that allow them to trace the economy-wide implications of such policies using specialized tools developed at NCAER. The daylong discussion by economists and agricultural experts on a variety of policies and their impacts provided insights for government policymakers to improve their understanding of India’s short and medium-term agricultural prospects in the next 3 to 5 years.

While launching the National Workshop, Dr Shekhar Shah, Director-General, NCAER, noted, “Between droughts and downpours, it is the Indian farmer who pays the price. The poor crop and price outcomes expected this rabi season is a graphic reminder of the vulnerability that Indian agriculture still faces. Between the vagaries of the weather and the inability of policymakers to design and implement sensible policies in agriculture, whether to do with irrigation, subsidies, marketing, or supply chains, the India farmer ultimately gets squeezed. And this then leads to more sops rather than structural reforms. Breaking out of this vicious cycle does not require rocket science. We have the answers. But it does require policymakers to take a realistic view of both technical solutions and the politics of agricultural reforms, and map a strategy for sequencing successful reforms, whether it is in cereals or sugar-cane or oil-seeds or pulses, based on solid evidence of what works and what the rural voter will accept. This has to be one of the highest reform priorities for the government.”

The findings of the NCAER report are based on a comprehensive assessment of farm input prices and availability, monsoon rainfall, market demand conditions and government policies impacting this year’s rabi and kharif crop production. Wheat production in marketing year 2016-17 is expected to be lower at 85 million tons as compared to the already poor 2015 production of 88.9 million tons due to poor weather, and wheat exports are likely to remain negligible. The 2015-16 rabi rice production is expected to be somewhat lower than the 2014-15 production due to poor post-monsoon rains and lower water levels in reservoirs. Rabi rice exports are forecast to decline to 9.0 million tonnes from 11.8 million tons in marketing year 2014-15.

While introducing NCAER’s short and medium-term agricultural scenarios, the principal author and team leader of the NCAER study, Dr Rajesh Chadha, NCAER’s Senior Research Counselor, remarked that, “The present Rabi report provides a comprehensive assessment of the challenges arising due to aberrant rainfall patterns despite extensive investment in irrigation technology and sharing of best practices. The report covers indicators of supply and demand for major food commodities, both in the domestic economy and the global markets. External factors continue to remain less conducive to agricultural exports this year due to a better global production outlook and large carryover stocks for most traded commodities such as wheat, rice, maize, and soybean/soybean meal, except in the case of sugar.”

The study highlighted the severe supply-side bottlenecks that persist in Indian agriculture, including poor logistics, outdated marketing arrangements, inadequate cold storage facilities, and lack of processing facilities. These continue to hurt supply and the availability of food items such as pulses and perishable food products. Dealing with these domestic structural distortions affecting the production, storage, transport and marketing of agricultural production should be at the top of the agenda for Indian policymakers if they wish to take Indian agriculture into the 21st century.

On the external front, the NCAER report finds that global food markets are likely to have remain well stocked and therefore were less volatile in 2015-16. As a result, international prices of most commodities have remained well below their prices a year ago, although projections show that most commodity prices are likely to firm up modestly in 2016-17. The report noted that external factors continue to remain less conducive to Indian agricultural exports this year as was the case last year. This was due to a better global production outlook and large carryover stocks for most commodities traded by India. Indian exports could face tough competition in the global market as domestic prices are likely to rule above world prices. There could be an increase in the import of pulses, which along with the recent weakening of the Indian rupee against the U.S. dollar, could lead to higher prices for Indian consumers.

NCAER organised a seminar by Dr Frederico Gil Sander to discuss the World Bank’s recently released India Development Update 2015: Fiscal Policy for Equitable Growth.

Dr Sander, World Bank’s Senior Country Economist presented an overview on the report which projects that India’s GDP will grow by 7.5 percent in FY2015-16 and by 7.8 and 7.9 percent in the next two fiscal years.  The dramatic decline in crude oil prices since 2014 has played an important role in driving this favourable economic outlook. He spoke on the extent to which India reaped the benefits of this oil price bonanza and its implications for growth prospects. The fall in oil prices helped through decline in inflation, reducing fuel  subsidies and narrowing current account deficit. The resulting fiscal consolidation created space to increase capital spending on infrastructure especially roads and for RBI to cut policy rates to boost investments. However, global economic conditions remain uncertain and key structural reforms are necessary to maintain pace of growth. Fiscal policy reforms, in particular GST and devolution of funds to states in 14th Finance Commission would further help in transforming India to a single market and enhance capacity of state and local governments to deliver better public services.

Joining the seminar as a discussant, Dr Pinaki Chakraborty, Professor, NIPFP presented his views on implementation of GST bill and recommendations of 14th Finance Commission, specifically problems with making GST tax rate of 18% constitutional, origin based 1% additional tax and leaving petroleum out from perview of GST given its huge cascading effect.  He also recommended relooking at all Centrally Sponsored Schemes and reorganizing them into core and  non-core based on top national priorities.

Dr. Anusha from NCAER highlighted that although growth projections are optimistic, it is important to estimate the magnitude of output gap more carefully given low capacity utilization and slowdown in investments.   Dr Bornali Bhandari from NCAER, while agreeing with the overall outlook, commented on the lack of discussion on agriculture; not emphasising enough the role non-performing assets in the banking sector, which was restricting the public sector banks in passing on the lower interest rate to customers; high inflationary expectations and; mixed services outlook.

About Dr Frederico Gil Sander 

He is the World Bank’s Senior Country Economist based in New Delhi. He was most recently the Bank’s Senior Country Economist for Malaysia and has worked on macro and debt management for Thailand, Laos, Cambodia, and Myanmar, and on debt relief for low-income countries. Before joining the Bank he worked on emerging market debt & capital markets at the New York firm of Bear Stearns.  Sander has a PhD in Political Economy from Princeton’s Woodrow Wilson School.

A book on managing Think Tanks by Raymond Struyk was released by NCAER and the Washington DC-based Results for Development Institute (R4D) whose research program on think tanks has yielded the book. This publication demonstrates that better management is possible, cost-effective, and can be highly rewarding.  It contains best practices, case studies, and strategies based on the experience of over 80 think tanks globally, drawing from the Think Tank Initiative, the Global Development Network, and the Think Tank Fund. 

In this comprehensive guide, author Raymond Struyk encourages think tank managers to make improvements to increase efficiency and guides them through lowering the costs of making those improvements. The examples shared confront specific issues managers often experience, such as difficulty motivating staff, controlling project costs, assisting project leaders, and becoming more efficient with fundraising.

Dr Raymond Struyk is a Senior Fellow at R4D and currently Interim CEO at the think tank MDRI-CESD in Myanmar. He has led housing and finance development projects in Indonesia, Russia, Hungary, Egypt, and Eastern Europe.  Struyk founded the international program at the Urban Institute, where he worked for over 30 years.  He served as the Deputy Assistant Secretary for Research and Evaluation at the U.S. Housing Department in the Carter administration. He is also the author of Managing Think Tanks: Practical Guidance for Maturing Organizations.

The Book launch event was followed by a Panel Discussion on Evidence-based Policymaking: The Role of Think Tanks in South Asia. As the countries of South Asia grapple with multiple and often-conflicting public policy priorities in resource scarce settings, the need for solid evidence and analysis to drive policymaking has never been greater.  At their best, think tanks generate evidence based on good data and credible analysis, influence public opinion, and help create the social and political conditions for better policymaking.  The discussion tried to answer questions like, Are South Asian think tanks living up to their potential? What are the economic, political, and institutional constraints they face? How best can they be alleviated? How can governments and donors help?

Panellists included Arvind Subramanian, Chief Economic Advisor, Government of India, Swaminathan Aiyar, Consulting Editor of The Economic Times and author of popular weekly column called ‘Swaminomics’ in the Times of India, Abid Suleri, Executive Director, Sustainable Development Policy Institute, Pakistan, Shubhashis Gangopadhyay, Director, School of Humanities and Social Sciences, Shiv Nader University and Ray Struyk. Directors from the 14 South Asian think tanks that are a part of the global Think Tank Initiative also joined the discussion.

The Review of Indian Economy presented by NCAER today, covered the performance of the economy during the first half of the current year (April- September 2015-16), and made projections for the later part of the year. Besides a stocktaking of the economy’s performance, the Review also included detailed discussions on key policy issues in form of two presentations, titled, ‘Towards a Clean, Green, Inclusive Urban India’ and ‘A Critical Perspective on the Trinity: Jan Dhan Yojana, Aadhar and Mobile Telephone (JAM)’.

The Review presented by Mythli Bhusnurmath and Dr Bornali Bhandari from NCAER covered diverse aspects of the economy with the following highlights.

• NCAER expects GDP (GDP at market prices in constant 2011–12 prices) will grow at 7.4 per cent in 2015-16.

• Despite deficit rainfall, NCAER estimates overall food grain output during this year’s kharif season may be marginally higher compared to last year due to better rainfall conditions in areas where coarse cereals and pulses are grown.

• The industrial sector performed better with 4.0 per cent growth in the first half of the FY 16 as against 2.9 percent in the comparable period of the last fiscal. Further, using deseasonalised data, the quarter-on-quarter    growth continues to be strong and positive for three consecutive quarters. The non-annualised growth rates are 1.98 per cent in 2014:Q4, 1.38% in 2015–16:Q1 and 1.43% in 2015–16:Q2 overall signalling nascent revival in the industrial sector.

• The services’ sector, excluding construction, shows signs of waning growth; slowing down in the first quarter of the current fiscal (on year–on-year basis) to 8.9 per cent compared to 9.2 per cent in the quarter 4 of 2014–15. The outlook for the second half remains mixed.

• Inflation has declined over the period of the last one and half years. Retail inflation declined by an average of 1.4 percentage points between 2014–15:H1 and 2015–16:H1. Wholesale Price Index (WPI) inflation fell sharply, averaging 4.1 per cent (y-o-y) in the same period. Despite moderating inflation, inflation expectations continue to be high and inflation volatility shows signs of increasing, post the inflation-targeting regime.

• On the fiscal front, performance during the first half of FY16 is largely commendable with all key parameters for the first half of FY15 comparing favourably with the comparable period last fiscal. On the external front the first half has not been good and prospects for recovery remain poor in the rest of the year. The period April–September 2015–16 has posted a sharp year-on-year decline of 17.6 per cent in merchandise exports over the corresponding period of 2014–15 (55.5 per cent). Merchandise imports decreased 14.2 per cent in April–September 2015–16 compared with a decline of 1.6 per cent in the corresponding period of 2014–15.

Dr Pronab Sen, Chairman, National Statistical Commission chaired the sessions. The presentation of the Mid-Year Review was followed by Dr D B Gupta from NCAER presenting his paper on the opportunities to transform the urban scenario with new policies and programmes while Ms Vineeta Dixit presented her paper that examines the policy utility and challenges of J.A.M for the delivery of public services.

The Mid-Year Review of the Indian Economy was started at the India International Centre (IIC) in 1976 by Dr Malcolm S. Adiseshiah. Dr Adiseshiah was one of India’s most distinguished economists and educationists, Life Trustee of IIC, recipient of the Padma Bhushan, founder of the Madras Institute of Development Studies, and one of the key architects of UNESCO’s work on education and technical assistance. Now conducted in collaboration with the Malcolm and Elizabeth Adiseshiah Trust, Chennai, the Review has been presented by many distinguished Indian economists since Dr Adiseshiah’s passing away and remains an apex event on IIC’s programme schedule. NCAER has presented this Review for the fifth successive year now.

The Presentations were Webcast Live.