The NCAER 2019-20 Mid-Year Review of the Indian Economy

NCAER presented the 2019-20 Mid-Year Review of the Indian Economy on November 16, 2019 in cooperation with the India International Centre (IIC). NCAER macro team led by NCAER Distinguished Fellow Sudipto Mundle presented its latest analysis of the economic situation and its growth forecasts to an audience of policy makers, policy commentators, and the business media.

The NCAER Mid-Year Review (MYR) carries on the tradition started by Malcolm Adisheshiah at the IIC in 1976. Dr Adiseshiah, one of India’s most distinguished economists and educationists, a Life Trustee of IIC, recipient of the Padma Bhushan, and founder of the Madras Institute of Development Studies, was a key architect of UNESCO’s work on education and technical assistance. The MYR 2019 came at a time of heightened concern about a serious slowdown of the Indian economy, with both cyclical and structural factors coming together at a time when fiscal and monetary policy appear to have limited headroom to tackle the slowdown.

Bornali Bhandari, NCAER presented the Performance of the Real Economy and Trade and Sudipto Mundle discussed the Macroeceonomic policies. A Panel Discussion on Balancing Macrostability and Deeper Structural Reforms for a Growth Recovery was moderated by Pronab Sen, IGC.

The highlights of the report are as follows:

NCAER nowcast the GVA growth for Q2:2019–20 at 4.9 per cent (± 0.81 per cent).  It has also forecast the annual GDP growth for the whole year 2019–20 at 4.9 per cent (± 1.04 per cent). The Q2:2019–20 nowcast and the annual 2019–20 growth forecast has been arrived at by a joint NCAER-NIPFP modeling team. This presentation of the Mid-Year Review (MYR) of the Indian economy, is part of a long-standing partnership with the India International Centre.

Farm sector looks up 

Weakening economic growth has been cushioned somewhat by its the positive trend in agricultural production. Indian agriculture is still heavily dependent on the monsoon and, despite its late arrival, rainfall this year has been normal, as predicted in the forecasts of the India Meteorological Department (IMD). NCAER estimates the output of kharif foodgrains to be in the region of 149.1 million tonnes, which indicates an increase over last year’s record output of 141.7 million tonnes. The expected increase in output is attributable to the strong performance of all the three crop groups, viz., rice, coarse cereals, and pulses.  The estimates are based on area-weighted rainfall though they may be subject to adjustments because of abnormal rains in many parts of the country which may affect crops and crop quality.  The current year’s water storage in dams as on October 24, 2019 was 127 per cent of the long-term average, also pointing to an encouraging outlook for the rabi season.

Industry dips 

The industrial sector outlook is grim. The figures show that in Q1 2019–20, growth of all the industrial sectors declined barring ‘electricity, gas, water supply and utility services’. In Q2: 2019–20, the Index of Industrial Production (IIP) showed a year-on-year (y-o-y) decline in growth of (–) 0.4 per cent as compared to growth of 5.3 per cent in Q2: 2018–19. The three major components of IIP, that is, mining, manufacturing, and electricity, showed growth rates of (–) 1.2 per cent, (–) 0.4 per cent, and 0.4 per cent, respectively in Q2: 2019–20 compared to the corresponding rates of 0.9 per cent, 5.6 per cent, and 7.5 per cent in Q1: 2018–19.

Goods & services collectively hit 

Capital goods showed negative growth for nine months in 2019, with this slowdown deepening further in August and September 2019. The capital goods IIP grew at (–) 21.4 per cent and 20.7 per cent, respectively. The consumer durables IIP has registered negative growth since June 2019. In September 2019, the growth in IIP of consumer non-durables also slipped into negative territory. Thus, the overall outlook for the industrial sector remains gloomy due to weak demand and investment activities. The Nikkei Purchasers Managers Index fell to 50.6 in October 2019.

In the services sector, the indicators available for Q2: 2019–20 point to a decline in the growth of most services. The decline in railways cargo traffic, international air cargo traffic, and cargo handled at major ports, taken together, is indicative of a general decline in the level of economic activity during Q2: 2019–20. In line with this observed pattern during Q2: 2019–20, the Nikkei Purchase Managers Index (PMI) was also below 50 during both September and October 2019.

Retail inflation as measured by changes in Consumer Price Index (CPI) has gone up in September and October 2019, largely driven by a rise in the price of vegetables.  However, inflation of other retail prices and wholesale prices as well as core inflation (non-food and non-fuel) have been softening.

Marginal growth in exports 

On the external front, India’s total exports, including merchandise and services, is estimated to be worth US$ 267.2 billion for the first half of the Financial Year (FY) 2019–20. In other words, the period April–September 2019 witnessed a growth of only 1.9 per cent on a year-on-year (y-o-y) basis. The total imports during this period at US$ 312.16 billion, declined 3.1 per cent on a y-o-y basis. The trade deficit for the period April–September 2019 stands at US$ 83.7 billion, as compared to the corresponding figure of US$ 98.1 billion during the same period in FY 2018–19. The exchange rate has depreciated throughout the first six months of the year , except in September 2019 (on a y-o-y basis).

Lending to micro, small and medium enterprises shrinks  

In the monetary policy front, in a series of consecutive cuts, the Reserve Bank of India (RBI) has reduced the policy Repo rate by 135 bps to 5.15 per cent as of October 2019, given low inflation and concerns over slackening of growth. However, the transmission of rates has been weak, raising concerns about the effectiveness of monetary policy in reviving real output growth. Bank Credit to the Commercial Sector (BCC) grew by 8.5 per cent, lower than the growth achieved during the corresponding period of the previous year, with the credit extended to micro and small industries actually declining.  The credit squeeze for the MSME sector has been aggravated following the default by ILFS, which hit the Non-Bank Financial Companies (NBFCs).

Revenue shortfall 

On the fiscal front, the large shortfall in tax revenue observed in 2018–19 is likely to recur in 2019–20. In H1 of 2019–20, direct taxes have grown by only 5.2 per cent as compared to a target of 17.1 per cent set in the annual budget. Indirect tax collection has actually declined by (–) 2.1 per cent as compared to the growth target of 19.4 per cent set in the budget. The impact of tax revenue shortfall on total revenue is moderated by the very high growth of nearly 92 per cent in non–tax revenue, mainly on account of the massive transfer of RBI surpluses. Nevertheless, the total revenue growth in H1 of 2019–20 (the Centre’s share), at 18 per cent, is well below the target of 25.6 per cent. The large revenue shortfall is unlikely to be passed on as a larger deficit. Most of it is likely to be absorbed through expenditure compression. This is already evident in the trend observed in H1 of The credit squeeze for the MSME sector has been aggravated following the default by ILFS, which hit the Non-Bank Financial Companies (NBFCs).2019–20. We are, therefore, likely to see a further slowdown in aggregate demand and GDP growth during 2019–20 compared to 2018–19.