ECONOMY RESILIENT, Growth Persists Amidst Inflation

The first quarter GDP growth estimate for the current year at 7.8% released by the Ministry of Statistics and Programme is indeed creditable in an environment of global slowdown and at a time when most countries have been struggling to post reasonable growth. Although it is lower than the 8% growth projected by the RBI, the estimate conforms well to the market expectations. Of course, in the coming quarters, the economy is likely to slow down and the growth for FY24 is estimated at 6.5% by the RBI.

Food Inflation – An Ingredient of Concern in Combatting CPI Inflation

Economies across the globe have been combatting inflation. In India, the y-o-y CPI inflation climbed a 15 months high to 7.44% in July 2023 mainly on the back of sharp escalation in food inflation by 11.4%. While the CPI inflation scaled higher on back of food inflation, the latter peaked due to higher prices of vegetables, spices, pulses, cereals and milk and milk products. Inflation in vegetables rose as high as 37.34%; tomatoes reached as high as Rs 200 /kg. Inflation in spices stood at 21.63%, pulses at 13.27%, cereals and products, 13.04% and milk and milk products 8.34%. The only respite to consumers lied in lowered prices of oil and fats that witnesses a deflation (-16.8%)

Aspirations for Internationalization – The case of the Indian Rupee during the 77 th year of Independence

The emergence of global crises with potential to generate major economic and financial upheavals such as the Southeast Asian Crisis of 1997, the US subprime crisis of 2008, or the Russian invasion of Ukraine in early 2022, have time and again brought forth the concerns and debates exploring the possibilities of ushering in a multi-currency system.

CPI Inflation - A Pressing Concern, Food Inflation - Too Costly A Component, Reveals Data for July 2023

The all India y-o-y CPI inflation scaled to 7.44% in July 2023, reaching a 15 months high and is much higher than the market expectation of 6.5%. The inflation rate was 4.8% in June. The sharp increase in the July inflation caused the Monetary Policy Committee (MPC) to revise the projection for the second quarter from 5.2% to 6.2% and for FY 2024 the projection has been revised from 5.1% to 5.4%.

Challenges Before the Sixteenth Finance Commission

The Sixteenth Finance Commission will have to be appointed soon and it will have challenging tasks in the prevailing difficult fiscal environment of Indian federalism. The Fifteenth Finance Commission‘s recommendations will be up to 2025-26 and the new Commission’s recommendations should be available for consideration by the Finance Ministry before presenting the Union budget for 2026-27.

The Debt Dilemma: Saving the Burden on the Future Generation

Elevated levels of India’s fiscal deficit and public debt have been a matter of concern in India for a long time. Even before the pandemic, debt levels were among the highest in the developing world and emerging market economies. The pandemic pushed the envelope further and relative to the GDP, the fiscal deficit in FY21 increased to 13.3% and the aggregate public debt to 89.6%.

GDP Growth in FY 2023: A Note of Cautious Optimism

A better-than-expected fourth quarter growth in 2022-23 at 6.1 per cent has pushed the growth rate for the year to 7.2 per cent. For most economic analysts, this came as a big surprise and is much higher than the assessment of the Monetary Policy Committee (MPC) of the RBI (6.8%). In a scenario of global slowdown, this is certainly creditable.

GST Reform to Aid Economic Recovery

The economic indicators show steady progress in the recovery process. Although the core sector growth continues to be muted, both manufacturing and service sector PMI indexes have shown a significant rise in April 2023 indicating a steady expansion of activities in these sectors. The manufacturing PMI increased to 57.2 as compared to 56.4 in the previous month, and this was the highest in the last 4 months.

State of the Economy: Challenges of Sustaining Growth and Controlling Inflation

In a surprise move, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to take a pause after increasing the interest rate in 6 consecutive meetings. It has increased the repo rate by 250 basis points (bps) since May 2022.

Focus on Growth and Fiscal Consolidation

The economy has passed through successive shocks in the last three years posing difficulties in both growth and macroeconomic stability. Beginning with 2020-21, when the economy contracted by 6.6 per cent due to the successive waves of the pandemic, it barely staged a recovery to 8.7 per cent in the next year and close to 7 per cent in the current fiscal.

Fiscal Policy Stance is Clearer: On to the Monetary Policy

There were considerable apprehensions about how the Finance Minister would balance the fiscal consolidation objective with the objective of reviving growth by increasing infrastructure spending. The budget proposes to compress the fiscal deficit by half a percentage point to GDP to 5.9% while increasing the capital expenditure from 2.7% of GDP to 3.3%

The Inflation-Growth Dilemma: Walking the Tight Rope

The Finance Minister has the difficult task of preparing the budget at a time when both global and domestic economic environment is far from being congenial. According to the IMF, the world economy is projected to grow at just about 2.7% in 2023 as compared to 3.2% in 2022 and 6% in 2021.

The State of Indian Economy: Growth-Inflation Conundrum

The muted economic growth situation and rising inflation continue to be a matter of concern in India. The Q2FY23 estimate of GDP at 6.3% on year-on-year (y-o-y) basis is significantly lower than the growth in Q1FY23 (13.5%). This partly reflects the waning of the base effect and partly the stickiness in the recovery process. While the growth rate of GDP is as expected, Gross Value Added (GVA) growth is 0.7 percentage points lower at 5.6%, which shows that a considerable part of it is due to the high collection of indirect taxes minus subsidies

Lower Quantum of Rate Hikes

The statement of the Monetary Policy Committee (MPC) announced today by the Governor of the Reserve Bank of India (RBI) is in line with the BWR expectations. In a 5-1 majority, the MPC has decided to increase the policy repo rate by 35 basis points with immediate effect. With this, the repo rate at 6.25% has reached the February 2019 level. The stance of the MPC remains unchanged, continuing with calibrated withdrawal of accommodation, but with 4-2 majority.

Another repo rate hike is on its way

As the CPI inflation rate has continued to remain above the RBI’s tolerance limit of 6% for tenth consecutive months, the MPC is likely to continue tightening in its upcoming policy meeting. The RBI has already missed its inflation target range of 2% to 6% for three consecutive quarters, and with inflation still above the comfort zone, the rate hike seems inevitable. We expect the increase to be limited to 25 to 35 basis points.

Economic Recovery and Growth Acceleration: Searching for Fiscal Space

At last, there is some encouraging news on the economic front. Although the credit rating and multilateral lending agencies have been revising the growth rate downwards and inflation continues to rage above the upper tolerance limit, some high-frequency economic indicators are showing signs of continued recovery. Of course, it is still unclear whether this recovery will sustain, but it provides an encouraging possibility. Equally important is the fact that the fiscal implementation in the first half of the year has not been a matter of concern, but there could be challenges in ensuring adequate fiscal space to assist continued recovery while containing the deficits and debt at the budgeted level. It is important to take note of the challenges and ensure adequate fiscal space for continued recovery.

Fertiliser industry likely to witness healthy growth

BWR expects y-o-y growth of 2%-4% in domestic fertiliser production and 7%-9% growth in fertiliser imports during FY23 owing to an addition in production capacity, healthy demand backed by surplus rainfall and high sowing. Similarly,BWR expects that the fertiliser industry will maintain its profitability momentum in the remaining period of FY23 due to a massive subsidy allocation.

Rising automobile sales to aid automotive demand

BWR expects the auto component industry revenue to report y-o-y growth of 11%-13% in FY23.Due to supply-chain disruptions and a shortage of semiconductors, there was a gap between demand and supply of automobiles in FY22, leading to deferred demand.BWR expects demand in the FY23 aftermarkets to further increase at 6%-8%, backed by a change in peoples preference towards using older vehicles for a longer period.

MPC Meeting: A Balanced Policy Approach

The statement of the Monetary Policy Committee (MPC) announced today by the Governor of the Reserve Bank of India (RBI) is in line with the BWR expectations. The MPC has decided to increase the policy repo rate by 50 basis points to 5.9% with immediate effect in a 5-1 decision. The stance of the MPC remains unchanged, continuing with the calibrated withdrawal of accommodation.

Modest moderation likely in FY23 GDP outlook

The prolonged war between Russia and Ukraine, and its adverse consequences have heightened the risk of a global recession. As central banks globally are aggressively raising interest rates to combat inflation, global growth recovery has weakened sharply, raising the fear of a recession in major advanced economies. Higher inflationary levels and a steady increase in the policy rate to combat the rising prices on the one hand and arrest the flight of capital on the other have increased the risk to the domestic growth outlook.

Cement demand to continue to witness healthy growth in FY23

BWR expects demand for cement to increase by around 10%-12% due to a rise in government spending on infrastructure development and real estate growth, despite a moderation in demand in the wake of higher inflation.With the rise in demand and continuous rise in input costs,BWR expects cement prices to further increase by about 4-6% y-o-y in FY23.

Monetary Tightening Approach to Continue

With the CPI inflation rate reaching the 7% level again in August 2022, the RBI is likely to continue with its monetary tightening in the upcoming policy meeting. We expect a 50 basis points increase in the repo rate and appropriate liquidity boosting measures to support growth.

Introduction of 5G: A Step Towards ‘Digital India’

Brickwork Ratings (BWR) expects the Average Revenue Per User (ARPU) and Minutes of Usage (MOU) to increase y-o-y by 20-22% and 13-15% owing to another price hike and launch of 5G premium plans. Similarly,BWR expects the EBITDA margins of telecom operators to witness a 20-22% growth in their EBITDA.

Mixed growth signals; Recovery continues

Domestic growth prospects continued to be impinged by adverse global developments such as the prolonged Russia Ukraine war, tightening of financial conditions and rising risks of a global recession. However, there is some easing in price challenges and external concerns, such as easing crude oil prices, a reversal in capital outflows and an improvement in manufacturing activities in the recent months, bringing optimism.

Infrastructure and Policy Initiatives to Enable EV Momentum in FY23

The adoption of Electric Vehicles (EVs) has globally increased exponentially over the past decades mainly in light of rising environmental issues, such as global warming, caused by higher pollution. In India, the shift in consumer preference to EVs is supported by government incentives and also due to the increasing maintenance cost of non-electric vehicles, considering a rise in fuel costs.

Road Construction: On the Path to Recovery

Brickwork Ratings (BWR) expects led by government initiatives, road construction to increase by 9-11% in FY23. Similarly, BWR expects connecting O&M to BPC would increase the HAM efficiency and smoothen the operation of the road projects awarded under the HAM, thereby further increasing the market share..

Rising Interest Rates and Growth Challenges

The growth dynamics for FY23 changed tremendously following Russia’s war with Ukraine, and rising price pressures have added to the dilemma. The domestic growth prospects continued to be impacted by adverse global developments such as the prolonged Russia-Ukraine war, tightening of financial conditions, and rising risks of a global recession. Persistent supply-side disruptions and a meteoric rise in energy-related supplies have led to a spike in inflationary challenges, while worsening external concerns, rupee depreciation and the retrenchment of capital flows have been adding to the woes. The record-level inflation has also intensified significant downside risks to the growth momentum.

Focus on managing inflation; Forward guidance a little more hawkish

The Reserve Bank of India (RBI), in its Monetary Policy Committee (MPC) statement announced today, has increased the policy repo rate by 50 basis points to 5.4% with immediate effect in a unanimous decision. The statement continues to focus on the withdrawal of accommodation without a change in the policy stance to neutral.

RBI likely to raise repo rate by 25 to 35 bps in August MPC

Despite a slight dip in inflation, the RBI is likely to continue with its monetary tightening and increase the repo rate by 25 to 35 basis points as CPI inflation is still above the MPC’s upper tolerance level of 6%

Auto sales to surpass pre-pandemic levels in FY23

Brickwork Ratings (BWR) expects the growth momentum to continue for PVs and CVs at a rate of 12-14% and 16-18%, respectively, in FY23, largely supported by the deferred sales from FY22. Similarly, BWR expects automobile exports to grow by 14-16% in FY23 with some downside risks emanating from the rising probability of the global economic slowdown, which may hinder demand for domestic exports.

Private sector drives new project investments in Q1FY23

As per provisional data released by the CMIE, growth in new industrial investments during the April-June 2022 quarter (Q1FY23) on a year-on-year (y-o-y) basis increased by 23.7%, while on a quarter-on-quarter (q-o-q) basis, it slid by 38.5%. The investments reported the first sequential drop on a q-o-q basis since Q3FY21. As compared to the corresponding period in previous years, the investments remained the highest since Q4FY19

Economy on the path to recovery; uncertainty prevails

On July 1 this year, we completed five years since the implementation of the reform of domestic consumption taxes to evolve the standard invoice-credit type destination-based consumption type value-added tax on goods and services. To get all the 29 states and union territories to agree to forgo their tax autonomy in favour of tax harmonisation five years ago was a phenomenal achievement. Not surprisingly, compromises had to be made, and the structure of the tax is far from ideal. With the improvement in administration, particularly the technology platform, the compliance of the tax has shown an improvement in the monthly revenue collection to record more than Rs. 1 trillion in the last ten months, and in June, the highest, at Rs. 1.45 trillion.

Indian steel industry to have a mixed FY23

Brickwork Ratings (BWR) expects that the growth momentum in the domestic market will continue in FY23 at a rate of 17-19%, backed by the rise in demand from various infrastructure projects. While the domestic market is expected to grow in FY23, Indian steel exports would take a downturn due to the rise in export duty.

Value-added dairy products to drive the industry in the near future

Brickwork Ratings (BWR) expects demand for both milk and milk powder to further increase by 5-7% and 4-6%, respectively, in FY23, with the revival of demand from the commercial segment. Furthermore, BWR expects key products under VAPs namely ghee, butter and ice-cream to grow by 8-10%, 6-8% and 14-15% respectively, in FY23.

Rising interest rates and heightened input costs may disrupt growth in real estate market in FY23

The real estate market, after witnessing robust growth in FY22, is expected to continue the growth momentum, albeit with some risks in FY23, with healthy demand from commercial real estate and slowing momentum from residential real estate.

Healthy growth expected to brew in the Tea Industry in FY23

Brickwork Ratings (BWR) expects the growth momentum to continue in CY22, and production and consumption to increase by 5-7% and 7-9%, respectively, in CY22. Although the increase in demand for tea and restrictions levied by the government on the import of substandard quality tea would enhance the production level by 5-7%, the increase in the wage rate could act as a speed breaker for the same.

Inflationary hurdle in the Economic Recovery path

The government is now being faced with the real policy dilemma between accelerating growth and taming inflation. With both domestic and global economic developments remaining inhospitable and with very little policy space left for calibrating fiscal and monetary policy options, both the RBI and Government are facing a serious policy dilemma.

Focus on managing inflation is the primary goal; more rate hikes expected

The Reserve Bank of India (RBI), in its Monetary Policy Committee (MPC) meeting announcement today, has increased the policy repo rate by 50 basis points to 4.9% with immediate effect in a unanimous decision. The statement focuses on the withdrawal of accommodation without mentioning the neutralisation of the policy stance.

Inflationary challenges mount; RBI expected to hike policy rates by 50 basis points in June 2022 MPC meeting

Increases in global commodity prices, serious supply-side disruptions in essential inputs due to the ongoing Russia-Ukraine war and accompanying sanctions and unfavourable weather conditions affecting supply of food items have adversely impacted both the output and prices. The escalation has also brought in considerable economic uncertainty. With surging inflationary pressures, we expect the RBI to increase the key policy rate by 50 bps in its upcoming policy announcement.

Paper industry to print healthy growth

The Indian paper and paper products industry witnessed numerous opportunities in FY22 to recover from prior years’ losses incurred due to the pandemic. The gradual reopening of educational institutions, resumption of work-from-office and popularity of online shopping made for some factors supporting demand recovery in the paper industry by 2-4% in FY22, and BWR expects the same to continue in FY23. Some major drivers for the paper segment were demand for kraft paper, which increased by 26-28%, and the revival of stationery paper and books (mainly due to a lower base effect) in FY22. BWR expects demand for paper products to increase moderately by 10-12% in FY23.

Renewable capacity additions doubled in FY22, set to reach record levels in FY23

FY23 is expected to be the best year for renewables in terms of additional capacity installed, as BWR expects a 15-18 GW capacity addition, with solar expected to add 13-15 GW and wind around 2-3 GW. The key reasons for this are effective government policy initiatives that have attracted substantial investments from the private sector, including foreign funds. Union Budget FY23 allocated Rs.19,500 crore for solar manufacturing under the Production-Linked Incentive (PLI) scheme, which is expected to usher in investments worth Rs.30,000 crore and improve the manufacturing capacity.

Indian Gems and Jewellery Industry to Glow More in FY23

Brickwork Ratings (BWR) expects gold sales in the domestic market to witness 10%-12% growth in FY23 owing to an increase in consumers’ purchasing power, festivities during the year and pent-up demand from postponed weddings. With gold demand crossing the pre-pandemic level in FY22 and improving further, BWR expects gold prices to increase by 8%-10% in FY23 on account of high inflation rates due to the growing geopolitical tension.

Fragile economy, recovery uncertain

There has been a dramatic change in the global economic outlook and its transmission to the Indian economy in the last three months. The Russian war on Ukraine and economic sanctions following the same have engulfed the whole world and have caused severe global economic stress, affecting emerging market economies such as India the most.

Pharma Industry Health Check: Growth to sustain in FY23

Brickwork Ratings estimates the pharmaceutical industry’s revenue to have grown by 11%-12% in FY22 and expects it to grow by 13%-14% in FY23 owing to a recovery in non-covid related drugs, surgeries that were postponed due to the pandemic and the formulation of vaccine boosters.BWR expects the industry to continue to increase its R&D expenses in the coming years on account of an enhanced need in the market to introduce newer products.

Hike in rate cycle begins

The Reserve Bank of India (RBI), in an unscheduled off-cycle Monetary Policy Committee (MPC) meeting, has increased the policy repo rate by 40 basis points to 4.4% with immediate effect and the CRR by 50 basis points to 4.5% from the midnight of 21 May 2022. Although the statement reiterates the MPC continuing with the accommodative stance, it also talks about its calibrated withdrawal to fight inflation. These decisions of the MPC members are unanimous.

Growth on patchy path

The deterioration in the global and domestic macroeconomy has been on a fast track since the Russian invasion of Ukraine began on 24 February. The massive destruction in life and properties, increases in global commodity prices and serious supply-side disruptions in essential raw materials due to the ongoing war and accompanying sanctions have adversely impacted both the output and prices. The domestic economy also has been severely affected by global developments, and the growth prospects do not look very promising.

Growth momentum to continue for the Indian cotton yarn industry

After having braved multiple headwinds in the last few years, viz., an unfavourable duty structure, volatile cotton prices and the Covid-19 pandemic, the Indian cotton spinning industry is finally enjoying its moment in the sun. The revival, which started in Q2FY21, was led by a surge in export orders, followed by recovery in domestic downstream demand.

MPC April 2022 Review: Towards Gradual Policy Normalisation

The Reserve Bank of India (RBI) has maintained a status quo on policy rates and has continued the accommodative policy stance in its Monetary Policy Committee (MPC) decision announced today. Both these decisions of the MPC are in line with Brickwork Ratings’ (BWR’s) expectations.

Investment Trends-Q4FY22

As per the provisional data released by the CMIE, new industrial investment for the January–March 2022 quarter (Q4FY22) increased sharply to Rs 5.1 trillion. Growth in investments on a year-on-year (y-o-y) basis more than doubled, while on a quarter-on-quarter (Q-o-Q) basis, investments increased by 53.7%. Although, the number of new projects announced during Q4FY22 was 40% lower than in the previous quarter, the investment trend in new projects has shown a marked increase after showing steady deceleration since the onset of the pandemic.

BWR Expectations from the April 2022 MPC meeting

Despite surging inflationary expectations, supporting broad-based economic recovery remains a priority. The economy has still not fully recovered from the pandemic shock and adverse geopolitical developments impeding the recovery process.

Geopolitical headwinds disrupt economic recovery; FY23 GDP growth to likely be around 7.5%: Brickwork Ratings

Receding Covid-19 caseloads, coupled with lifting of restrictions, are expected to improve growth prospects in the coming fiscal. However, supply side disruptions caused by the Russia-Ukraine war and shortages of critical components like semiconductors are likely to pose inflationary worries and significant downside risks to the growth momentum.

Inflation Review

The CPI inflation rate increased marginally to 6.07% in February 2022 from 6.01% in January. The current level of inflation is the highest recorded in the last eight months and is also higher than the 5.03% in February 2021. The CPI inflation rate remained above the 6% mark for the second consecutive month is a cause for concern.

Geopolitical tensions put economic recovery at stake

As we heaved a sigh of relief when after almost two years, the Covid-19-led restrictions on economic activity were relaxed, and as we began to brace ourselves for economic revival and accelerated growth, we are now struck with a huge uncertainty due to the Russia-Ukraine war. The fallout of the war on the already battered economy is on both the growth and inflation fronts.

Bank credit to witness healthy growth led by revival in economic activities, well-capitalised PSBs and under control NPAs to aid growth

Going forward, in FY22 and FY23, BWR expects banks’ credit outstanding to increase by 7.5-8.5% and 8-9% respectively, backed by a revival and growth in services and industries. The services sector, which was the worst affected during the pandemic, is expected to witness a turnaround as restrictions ease and economic activities improve.

Indian telecom industry on the road to revival

The Indian tele-density has grown at a brisk pace in the past couple of years, making India the world’s second largest telecom network. Since the last couple of quarters, the Average Revenue Per User (ARPU) has also grown at a steady rate, led by tariff hikes by all the three major telecom operators, as witnessed in November 2021.

GDP growth likely to be around 8.3% in FY22: Brickwork Ratings

The impact of the third wave of Covid on economic momentum may lower growth in the second half of the current fiscal (H2FY22). With the upward revisions of the FY21 GDP growth by Mospi, we revise our GDP growth projections for FY22 to 8.3% from the earlier forecast of 8.5% to 9%.

MPC maintains status quo to nurture growth

The Reserve Bank of India (RBI) has maintained a status quo on policy rates and has continued the accommodative policy stance in its Monetary Policy Committee (MPC) decision announced today. Both these decisions of the MPC are in line with Brickwork Ratings’ (BWR’s) expectations.

Nurturing Growth; Fiscal Support Continues

The Union finance minister was faced with severe constraints and challenges in formulating the budget this year. The pandemic is still on the rage, putting the brakes on capacity utilisation, particularly in contact-intensive sectors. The employment situation is precarious. Except for exports, all the growth engines are stuttering. Private consumption expenditure is still lagging from the pre-pandemic level, while government consumption and gross fixed capital formation have barely crossed it.

Growth over Inflation: MPC expected to continue with status quo

With the economy still in the recovery mode and the pandemic continuing to disrupt the recovery process, the MPC is expected to keep the policy rates stable at the current levels in its upcoming meeting, despite the persistence of higher inflation. However, there is limited scope for the MPC to continue with the current policy stance for long as supply chain disruptions, the elevated level of borrowing shown in the budget and rising crude oil prices amid excess liquidity may exert pressure on inflation.

Union Budget Brickwork Ratings Views

There were a lot of hopes and expectations about the 2022-23 Budget. Even as the economy has shown a revival, the first advanced estimate of GDP for the current fiscal shows that it has barely reached the pre- pandemic level. In some contact-intensive sectors, the revival has been slow and is yet to reach the 2019-20 level. These are the sectors that are employment-intensive, and two years of the continuous drag has created a huge burden of unemployment.

Economic Survey: A Realistic Stock-taking of the Economy

The Economic Survey presented in the Parliament today is essentially a stock taking document on the performance of the economy in the current year, various initiatives on the reforms initiated in various sectors to ease supply side conditions and measures taken to aid the recovery process, and structural reforms introduced for growth acceleration in the medium term. The Survey makes a realistic assessment of economic growth and macroeconomic stability based on reasonable assumptions without resorting to any rhetoric.

BWR Budget Expectations

The impact of the Coronavirus (COVID-19) pandemic on economic activities continued in FY22, with the emergence of new COVID variants disrupting recovery in the growth process. After a 7.3% contraction in the GDP in FY21, the economy was bracing for double-digit growth in FY22. Last year’s economic survey projected GDP growth at 11% for FY22. However, due to repeated restrictions following the new COVID mutants and second wave of the pandemic, growth momentum was constrained in several contact- intensive sectors of the economy.

Auto Components

BWR expects the auto component industry to witness a 15%-17% revenue growth revival in FY22 and 10%-12% in FY23 owing to a recovery in automobile sales, after having remained subdued in the last couple of years. Pent-up demand and a preference for personal mobility due to safety concerns led the recovery in automobile sales post relaxations in the lockdown. Additionally, a pick-up in economic activity augurs well for commercial vehicle sales. In addition, the scrappage policy and strict inspection of Pollution under control (PUC) certificates would boost the aftermarket of the auto component industry.

IIP down, Inflation up

The data released by the Ministry of Statistics and Programme Implementation (MOSPI) has shown that the Consumer Price Index (CPI) rose to 5.59% (provisional estimates, measured by y-o-y change) in December 2021, and growth in Index of Industrial Production (IIP) stood at 1.4%

Recovery continued; Momentum weakened

The advance estimate of GDP for FY22 shows that economic recovery is still in progress and is yet to take firmer roots. The estimated GDP growth in constant prices at 9.2% is marginally lower than the RBI’s estimate of 9.5%. Even this looks optimistic, considering the fact that the advance estimates are made by projecting the actual trend in the important indicators of economic activity in the last 6-8 months, and it does not take into account the economic impact of the meteoric rise in Omicron cases, which has been forcing states to impose restrictions on economic activity in varying degrees.

Downside risks to economic recovery; GDP growth estimates revised downwards to 8.5%–9% for FY22

Economic recovery was well under way after the second wave of the pandemic although since October, there have been some disruptions caused by semiconductor shortage, along with supply shortages in coal and power outages causing a slowdown in the manufacturing sector. Rising input prices too have added to the problem. Nevertheless, there was steady improvement in economic revival.

Investment Trends: New project announcements continue to remain muted

As per the provisional data released by the CMIE, new industrial investment for the September-December 2021 quarter does not infuse much confidence. At Rs 2,086 billion, growth in investments on a Q-o-Q basis was (-)6.5%, although it was higher at 41% on a Y-o-Y basis.

Central government’s fiscal deficit to reach 7% of GDP in FY22, against budget estimates of 6.8% of GDP

Data on fiscal trends released by the Controller General of Accounts (CGA) on 31 December shows that the cumulative fiscal deficit up to November 2021 adds up to 46.2% of the whole year’s budget estimate and is substantially lower than 135% recorded for the same period last year.

Stagnancy in Manufacturing Output Drags Overall Economic Growth

Although COVID-related restrictions on economic activity have been substantially relaxed, the relative stagnancy in the manufacturing sector output is a matter for concern. The expansion of the GVA in the manufacturing sector during the second quarter (Q2) of FY22 was the lowest among the secondary and services sectors, at just 5.5%, and as compared to the pre-pandemic level, it was just 3.9%. The sector’s performance in the two months of the Q3 too does not infuse much confidence. Growth in industrial production in October was at 3.2%, which is at eight-month low.

Growth-inflation dynamics: IIP falls, Inflation rises

Data released by the Ministry of Statistics and Programme Implementation (MOSPI) shows that the Consumer Price Index (CPI) rose by 43 basis points over the previous month to 4.91% (provisional estimates, measured by y-o-y change) in November 2021. It was 6.93% in November last year.

Increased Fuel Prices and Policy Push Owing to Environmental Concerns to Aid Traction in Electric Vehicle Sales

Over the last decade, issues such as a deteriorating air quality due to high pollution, extreme weather events due to global warming and a high dependency on crude oil imports have been a cause of concern for the transport sector in India. These concerns can be mitigated in environment-friendly ways and through the adoption of Electric Vehicles (EV), which could go a long way in reducing pollution, as well as the dependency on crude oil imports. Among all the sectors, automobiles are the major producer of greenhouse gases and have been trying to build a footing for EVs in the market.

Economic recovery is fast-paced, but concerns remain

The second quarter (Q2) GDP estimates for FY22 show that economic recovery in India is well and truly underway. Growth in the GVA recorded in the Q2FY22 at 8.5% and in the GDP at 8.4% has been impressive. The fact that GVA growth is higher than that in the GDP shows that recovery in the economy is truly impressive. The lower GDP is mainly due to growth in subsidies exceeding the growth of indirect tax collections. The estimate has exceeded market expectations, as well as that of many rating agencies although it was quite close to Brickwork Ratings’ (BWR’s) estimate of 8.3%.

RBI maintains status quo; normalisation of liquidity continues

Brickwork Ratings, Bengaluru, 08 December 2021: The Reserve Bank of India (RBI) maintained a status quo on policy rates and continued the accommodative policy stance in its Monetary Policy Committee (MPC) decision announced today. Both these decisions of the MPC are in line with the Brickwork Ratings (BWR) expectations.

Ceramic tiles expected to witness healthy growth led by strong exports and recovering domestic demand.

Brickwork Ratings (BWR) expects the Indian ceramic tiles industry, which is recovering from the pandemic impact, to witness 15%-20% growth in the next two years, i.e. CY21 and CY22. This can be attributed to an increased share of exports, coupled with the recovery in domestic demand on the back of the thrust on infrastructure development and real estate schemes such as Housing for All. Entities in the ceramic tiles industry have also been trying to penetrate new markets by promoting vitrified tiles, which can be used in non-residential spaces. The sector is highly competitive because of limited product differentiation and the largely unorganised nature of business.

Brickwork Ratings expects RBI to maintain status quo in December MPC meeting

The Monetary Policy Committee (MPC) is to announce the policy decision on 8 December in its bi-monthly monetary policy meeting. The better- than-expected GDP numbers for Q2FY22 have provided much-needed comfort to the MPC on the growth outlook, while the new Covid variant Omicron weighs concerns on sustaining this recovery. Supply-side concerns are impacting the price level as well, although decline in oil prices witnessed in the last couple of weeks should bring in some comfort.

Fed Tapering Unlikely to Create Instability in Indian Financial Markets: Brickwork Ratings

The Federal Open Market Committee (FOMC), on 3 November 2021, announced the unwinding of the policy accommodation provided by the Federal Reserve (Fed) in response to the Covid-19 pandemic. In the FOMC statement, the Fed has announced its decision of beginning to reduce the monthly pace of its net asset purchases in stages- by USD 10 billion for Treasury securities and USD 5 billion for agency Mortgage-Backed Securities (MBS) starting later in November 2021.

Inflation and IIP Review

As per data put out by the Ministry of Statistics and Programme Implementation (MOSPI), Consumer Prices Index (CPI), inched up by 13 basis points over the previous month to 4.48% (provisional estimates, measured by y-o-y change) in October 2021. The marginal increase in inflation in October over that in September 2021 was largely driven by rising fuel prices.

Economy is poised to record better growth; Sustained recovery is key.

Economic recovery in India is well and truly underway. Since the middle of March 2021, the second wave of the pandemic not only has created a severe health crisis, but has also forced the imposition of lockdowns in economic activities in virtually every state, thereby arresting the recovery process, which was underway since October 2020. Thus, although GDP growth in Q1FY22 was about 20.2%, it was well below the contraction in the Q1FY21 at 24.4%. With the relaxation of restrictions, the Q2FY22 has seen a steady recovery with increasing capacity utilisation in many sectors. However, full recovery is still some distance away, and many social distancing sectors are yet to resume their activities.

The Power Problem

With the lockdown-related restrictions on the economy being progressively relaxed owing to the declining COVID-19 cases and over 100 crore vaccinations administered, the economy has seen a fast-paced revival. October has seen a sharp acceleration in both, the manufacturing and services sectors, with the PMI index increasing to 55.9 from 53.7 in the previous month and the services PMI touching the highest in the last 10 years at 58.4 from the previous month’s index of 55.2.

Economic recovery underway; 10-10.5% growth expected in FY22: Brickwork Ratings

Many economic growth indicators are suggesting a faster-than-expected revival in economic activities, instilling greater confidence in economic agents as the number of new COVID-19 cases declines and leading to a sustained improvement in growth prospects. Most states have already relaxed restrictions on economic activities; with the progress achieved in vaccinating a sizeable proportion of the population, economic activities are likely to gather momentum. The pandemic toll on the economy has been huge, and contact-intensive sectors and supply disruptions may take some more time to fully recover.

Cement demand to post healthy growth, price rise will restrict contraction in margins despite expected high input costs in FY22

Cement demand, after having declined in FY20 (-1%) and FY21 (-11%), is expected to see healthy 10-12% growth in FY22 owing to a faster-than-expected recovery in the housing sector and the government’s thrust on infrastructure spending in the country. Pent-up demand and low interest rates have driven the realty sector amid the pandemic, and, the government’s push towards big-ticket infrastructure projects has increased the growth momentum for the highways sector. An improvement in these two sectors, which are among the largest consumers of cement, indicates a strong recovery path for the cement sector. The growth momentum is likely to continue, and production is expected to grow by lower double digits in FY23.

PM Gati Shakti to be a game changer in the space of infrastructure development: Brickwork Ratings

Prime Minister launched the Gati Shakti master plan on 13th Oct 2021. The plan envisages a centralised portal to unite the infrastructural initiatives planned and initiated by 16 central ministries and departments including Railways, Roads and Highways, Petroleum and Gas, Power, Telecom, Shipping and Aviation etc.

Economy on the Move: Onwards and Upwards

Steady decline in new cases and the progress achieved in vaccinating a sizeable proportion of the population have led to the relaxation of restrictions in most states. This has progressively revived both production activities and consumption demand. Pent up demand during the festival season is likely to improve demand conditions, further paving the way for improved capacity utilisation during the third quarter. The agricultural sector is also likely to post impressive growth in FY22 as the monsoon shortfall in the first three months has substantially been covered up in September and YTD in October 2021. Recovery seems to be broad-based, with the manufacturing PMI improving to 53.7 (from 52.3 in August) and services PMI at 55.2 (56.7 in August) in September.

Brickwork Ratings do not expect a policy reversal in the immediate future

In a unanimous decision, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), after closely assessing growth and the inflation outlook in the economy, has continued to maintain policy rates. With a 5-1 majority, it has also announced the continuation of the accommodative stance. Both the decisions of the MPC are in line with Brickwork Ratings (BWR) expectations.

Pandemic shocks notwithstanding, government’s thrust on infrastructure to ensure execution momentum continues in FY22

The Indian road network is the second largest globally, with a length of around 63.86 lakh km. The outbreak of the virus towards end-FY20 had created panic globally, leading to the temporary suspension of economic activity. The road sector in Q1FY21 suffered a major setback during the initial lockdown, resulting in a delay of commercial operation dates by three to six months for most projects. However, once the lockdown was gradually lifted, it gained pace in terms of construction, project allocation and toll collections. The execution was robust and the pace of 37 kms per day recorded in FY21 was the highest ever recorded by National Highways Authority of India (NHAI) in a financial year.

Reviving the Economy: Need to Walk on Two Legs

The official reaction to the first quarter GDP growth estimate for 2021-22 (Q1FY22) at 20.1% has been euphoric. The chief economic adviser (CEA) KV Subramanian, has emphasised that the economy is recording a “V”-shaped recovery and is poised for 11% growth, as projected in the Economic Survey. However, a closer analysis shows that the growth performance is not as glittering as one would like it to be. This impressive growth was recorded on the base of a devastating 24.4% contraction in the Q1FY21. Thus, even with this impressive growth, the economy is yet to catch up with the 2019-20 estimate. In fact, the Q1FY22 GDP actually declined by 16.9% from the immediately preceding quarter (Q4FY21).

Reforms announced by the government are a much needed breather for the telecom sector from the AGR heat: Brickwork Ratings

Brickwork Ratings, 15 September 2021, Bengaluru: The telecom sector which has played a crucial role during the pandemic has been struggling from quite a while now and seeking government support to tide over the crisis. The sector on various platforms have asked the government to address certain issues involving license fees, spectrum pricing & payment and payment of AGR dues.

Tamil Nadu State Budget 2021-22: Need for a sustainable fiscal consolidation path

Tamil Nadu implemented the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, and until FY20 the state had been adhering to the fiscal deficit target of 3% of the GSDP set in the Act (FRBM), except in FY17. The takeover of TANGEDCO’s debt under the UDAY programme increased the fiscal deficit beyond 3% in 2016-17. Although there was compliance with the fiscal deficit target, fiscal indicators in the state have shown a steady deterioration since FY13 as it moved from a revenue surplus to revenue deficit situation. This was mainly due to substantial decline in its own tax revenues. The surge in the share of revenue deficit in fiscal deficit from 8.69% in FY14 to 66.43% in FY21 sums up the situation.

Affordable Housing to be the fulcrum of recovery for Housing Finance Companies, BWR expects recovery by Q4FY22

Brickwork Ratings, Mumbai, 18 August 2021: Housing Finance Companies (HFCs) have grown at a healthy pace in the past few years, supported by growing demand owing to economic and social development, the government’s consistent focus on promoting housing and a supportive regulatory environment encouraging growth. Following the IL&FS fiasco in September 2018, the lender/investor community became wary of lending to non-banks, especially to standalone entities with exposure to wholesale lending or wherein the asset-liability mismatch was relatively high with a limited liquidity cushion or wherein the AUMs were relatively small or the portfolio had limited vintage.

Economy on the Recovery Path

At last, after a prolonged period of gloom, there is some good news, though it is too early to start cheering. The number of new coronavirus cases, which rose meteorically from March to peak at a daily average of 3.92 lakh in the week ending 8 May, have shown steady decline to reach 37,975 in the week ending 22 July, but marginally increased to 40,710 in the week ending 3 August. This has led to relaxations in restrictions and not surprisingly, the PMI Manufacturing index, after showing a sharp contraction in June at 48.1, jumped to a 3-month high of 55.3 in July. The Services PMI, however, has continued to remain in the contractionary mode, although it improved from 41.2 in June to 45.4 in July. This trend indicates that the adverse impact of the second wave of the pandemic on economic activities is on the wane and would be confined to the first quarter, unless the pandemic resurges in the form of a third wave.

Higher delinquencies notwithstanding, MFIs expected to grow in FY22

Microfinance Institutions (MFIs) that offer financial services to the low-income population felt the heat of the pandemic in FY21, with growth in their Gross Loan Portfolio (GLP) slipping into low double digits, which was probably a first in a long time. The GLP for NBFC-MFIs grew by only 11% y-o-y in FY21, given that H1FY21 witnessed much-reduced activities due to the pandemic- induced lockdown and moratorium. Smaller MFIs were also impacted by the lack of funding availability and high fund costs during this period due to the looming risk of defaults post the moratorium. This low growth has largely been supported by the disbursement of additional loans or top up loans by larger MFIs to existing (relatively better placed) customers as new client additions during the year remained very low owing to an environment of scepticism induced by the pandemic.

Brickwork Ratings expects a better clarity on future guidance on growth and inflation outlook by RBI in the next MPC meeting

The Reserve Bank of India’s (RBI), Monetary Policy Committee (MPC), after a detailed assessment of growth and inflation outlook in the economy has, in a unanimous decision, continued to hold policy rates. It has also announced the continuation of accommodative stance with 5-1 majority. Both the decisions of the MPC are in line with BWR expectations.

Brickwork Ratings’ expectations from RBI MPC’s August meeting

The Monetary Policy Committee (MPC) of the RBI has kept key policy rates unchanged since May 2020, after having brought them down to a record low of 4% from 5.15% through two rate cuts (75 bps in March 2020 and 40 bps in May 2020), to assuage the economic consequences of the Covid-19 pandemic. Moreover, the MPC has continued with the accommodative policy stance after changing it from neutral to accommodative in June 2019. In addition, to enable the smooth functioning of financial markets, the RBI announced additional liquidity boosting measures such as OMOs, G-saps, forex swaps, TLTROs and sector-specific measures.

Auto sector set to recover H2FY22 onwards; third wave could act as ‘speed breaker’ and play spoilsport

The Indian automobile sector witnessed robust growth over the last decade (during pre-Covid times) due to lower penetration historically and increased disposable incomes among the masses. However, the last couple of years have been an exception, with sales plummeting on account of an overall slowdown in the economy, the rising cost of vehicle ownership, revised axle norms impacting commercial vehicle sales, deferred buying due to the implementation of Bharat Stage Emission Standards and lastly, the pandemic when green shoots were becoming visible.

Economy in Recovery Phase, but Challenges Abound July 2021.

Economic recovery, which was progressing well until March this year, was suddenly arrested due to an unprecedented surge in infections. However, unlike last year when the central government imposed the strictest lockdown across the country, curbs imposed by states were partial in terms of both, activities and districts within the states, mainly depending on the positivity rate. Nevertheless, the adverse impact of the second wave of the pandemic on economic activities has been significant, and still continues in some states.

Repeated state-level restrictions to limit GDP growth at 14% in Q1FY22

The economy was well under recovery from the devastation caused by the first wave of the pandemic until the second wave hit the economy, starting April 2021, bringing the recovery process to an abrupt halt. The unprecedented and swift spread of the lethal virus in the second wave has caused a severe disruption in the recovery process, with almost all the states imposing restrictions on economic activities and lockdowns of varying degrees to contain the spread of the virus. Unlike last year when the centre announced a complete lockdown, this year the decision of imposing such restrictions was taken by states. Of course, almost all the states were forced to impose restrictions of varying coverage of activities and regions.

Kerala State Budget 2021-22: Fiscal situation demands a credible fiscal consolidation plan and its careful calibration

Kerala’s performance in containing the first wave of the Covid-19 pandemic was exemplary, and it was the first state to unveil a Rs 20,000 crore financial package in March 2020 to tide over the pandemic crisis. The impact of the pandemic on this state’s fiscal health was disastrous, as in the case of other states. Due to the lockdown and closure of economic activities the GSDP in current prices for 2020-21 contracted by 3.8% over the previous year. Apparently, the state missed its FY21 budget targets by a substantial gap.

Real Estate: Sector hit by pandemic when already battling with economic slowdown, but recovery not far off

The real estate sector was already facing a huge crisis before the pandemic hit. It was battered by low sales, stagnating prices and high unsold inventory in the market. Developers were coping with a liquidity crunch on the back of lacklustre sales and reduced funding from NBFCs. The situation had started to improve, with buyers’ sentiments turning positive, aided with the governments push towards affordable housing. Hence, developers started focusing towards this segment by reducing ticket sizes and unit sizes in a bid to encourage sales. The limited recovery witnessed by the sector came to a halt when the Covid-19 pandemic struck globally and its economic impact started becoming visible. Complete business closure in the first half of the year to subdued business activity later on resulted in the sector facing huge losses in terms of demand.

Mounting inflationary pressures; upward revision in inflation outlook by MPC likely

As per the monetary policy framework, the RBI’s Monetary Policy Committee (MPC) has to maintain CPI inflation in the 2% to 6% range, with the median target of 4%. On 31 March 2021, the Government retained this target for the next five years (April 2021-March 2026), and therefore, keeping the inflation below 6% is crucial for the RBI. Meanwhile, in the June MPC meeting, the RBI projected a 5.1% inflation outlook for FY22. Recent data on inflation in both the Wholesale Price Index (WPI) and Consumer Price Index (CPI) points towards a rising trend. WPI inflation in May rose to 12.94% (highest in the series), and CPI inflation surged to 6.3%, the highest since November 2020.

Covid 2.0: Lingering Uncertainty over Economic Recovery

The provisional estimate of the GDP for 2020-21 released by the National Statistical Office (NSO) on 31 May 2021 shows a better-than-expected contraction at 7.3%. After registering negative growth of 24.4% in the first quarter and a contraction of 7.4% in the second, the economy started recovering to register positive growth rates of 0.5% and 1.6%, respectively, in the last two quarters of the year. However, this nascent recovery has come to an abrupt reversal with the raging second wave of the pandemic. The pandemic has been spreading at a faster rate than in the first phase and has been more ferocious in claiming lives. What is more saddening is that the second wave has been seen to have a much deeper penetration into rural areas as well. The sudden resurgence of the pandemic has threatened to leave a long trail of death and destruction, reverse the recovery process, sharply increase unemployment and push people deep into the poverty trap.