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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Andhra Pradesh is one of those States that were badly ravaged by the Covid-19 pandemic in the first wave. The number of positive cases in the State rose to 6.8 lakh during the July to September 2020 period, making it the State with the second highest number of infections in the country, following Maharashtra. However, in the second wave, the State has witnessed fewer infections, although it has had to adopt containment measures, including the extended curfew till 10 June as it continues to report new cases. The number of active cases are as many as 1,23,426 as of 6 June 2021, and the total confirmed cases number is 17,58,339 so far.
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The Reserve Bank of India (RBI), after its second bi- monthly Monetary Policy Committee (MPC) meeting for the current fiscal year announced today, maintained a status quo and an accommodative policy stance. Both the decisions of the MPC are in line with BWR expectations. Growth and Inflation Outlook: Hope generated by the vaccination drive has been offset by the surge in the number of cases across several states and the virus spreading into smaller towns and villages in the recent months. Due to the fresh restrictions imposed by the states to contain the virus spread, recovery in most sectors of the economy has again been disrupted.
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The better-than-expected GDP numbers provide the much-needed comfort to the MPC on the growth outlook. However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified. Hence, the RBI is likely to continue with its accommodative monetary policy stance in the decision of the MPC meeting to be announced on 4 June 2021.
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The deadly coronavirus disease (COVID-19) has continued to spread at a faster pace in the second wave, crossing the grim milestone of over 4 lakh cases and over 4,500 deaths recorded in a single day. India’s record high infections have put the country’s health infrastructure under tremendous pressure, resulting in a shortage of hospital beds, oxygen and essential drugs. This prompted many states to take safety measures and announce localised restrictions and curfews in different forms. The magnitude of these restrictions was not as stringent as it was in the first wave.
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In the last one month there has been a dramatic change in the country’s economic mood. In end-January, the Economic Survey had declared, “India has been able to avoid the second wave while ably managing to flatten the epidemiological curve, with its caseload peaking in mid-September”. It went on to state, “....The V-shaped economic recovery is supported by the initiation of a mega vaccination drive with hopes of a robust recovery in the services sector. Together, prospects for robust growth in consumption and investment have been rekindled with the estimated real GDP growth for FY 2021-22 at 11%”.
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The Finance Minister of Maharashtra presented the 2021-22 budget in March, against the backdrop of an ailing economy struck by Covid-19. The economy was slowly getting back to normalcy from the grim of the pandemic, but the second wave of Covid infections, with the emergence of variants and fresh lockdowns again posed risks to a sustained recovery. The sharp surge in the cases causing the need for more spending on health infrastructure and vaccination, additional restrictions on economic activities and constraints on manufacturing activities due to problems in both supply (diversion of inputs such as liquid oxygen from manufacturing) and demand sides are likely to substantially change the fiscal estimates of the state for 2021-22 from those budgeted.
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The deadly second wave of COVID-19 has brought India’s nascent economic recovery from the pandemic to an abrupt halt. Many state governments have imposed lockdowns or similar restrictions to contain the virus spread. These lockdowns restrict most of the normal economic activities, thus putting livelihoods at risk. The concern of an uncertain future has led to the start of the exodus of many migrants from urban agglomerations. This has added to the humanitarian crisis due to the non-availability of beds, ventilators and oxygen supplies. The situation is unprecedented, with a heart-breaking situation being witnessed in crematoriums and burial grounds.
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‘Atmanirbharta’ (Self-sufficient in Hindi) is an attractive catchword. In fact, for almost half a century post- independence, India has been talking of self-sufficiency – in food, industrial inputs, key scientific and defence areas, etc. Given the foreign exchange position of India, the amount of money available for imports was anyway very limited. However, the policy makers were also aware of the limitations of such a policy, particularly in certain sophisticated technological fields. Later, in the 90s, as multilateralism became the mantra of a globalised world, India also had to make choices. With a gradual increase in the Forex kitty, thanks to increasing exports, software prowess post the Y2K phenomenon and large inflow of remittances by Indian diaspora, imports got liberalised.
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‘Atmanirbharta’ (Self-sufficient in Hindi) is an attractive catchword. In fact, for almost half a century post-independence, India has been talking of self-sufficiency – in food, industrial inputs, key scientific and defence areas, etc. Given the foreign exchange position of India, the amount of money available for imports was anyway very limited. However, the policy makers were also aware of the limitations of such a policy, particularly in certain sophisticated technological fields. Later, in the 90s, as multilateralism became the mantra of a globalised world, India also had to make choices.
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Near-Term Challenges of Macroeconomy. The policy statement of the Monetary Policy Committee (MPC) was eagerly awaited, not so much for its decision on policy rates as the market did not expect any change, but more importantly for its forward guidance on the policy stance, and measures to manage liquidity and assist the growth process. Although managing inflationary expectations is the primary task of the MPC, its focus has been more towards assisting the government in economic recovery and ensuring liquidity to manage the yield curve to support the government borrowing programme. Of course, the market had expected that both the repo and reverse repo rates will be kept unchanged at 4% and 3.35%, respectively.
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The Reserve Bank of India (RBI), in its first bi-monthly Monetary Policy Committee (MPC) meeting for the current fiscal year announced today, maintained a status quo and an accommodative policy stance. Both the decisions of the MPC are in line with BWR expectations. On the GDP guidance, the RBI continued to maintain its forecast of 10.5% growth for FY22. On the inflationary side, the RBI sees a softening trend in prices in Q3 FY22 (4.4%) and maintained the 5.2% inflation forecast for H2 FY22. The expectation of inflation moving within the MPC’s target provides scope for the continuation of the accommodative policy stance for the near term. Overall, the tone of the MPC remained dovish, while supporting growth recovery, and financial stability concerns continue to remain the central focus of the RBI.
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The inflation levels above the RBI's mandated 4% median target, rising fuel prices, surplus liquidity, frontloading of government borrowings, rising yields, second wave of Covid-19 in the country’s major states, disruptions in economic activities due to partial lockdowns and uneven economic performances are among the major issues before the MPC when it meets for its first FY21 meeting during 5-7 April.
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Karnataka is one of the States with a history of good management of finances. It was the earliest State to enact the Fiscal Responsibility and Budget Management Act, even before the Union government enacted it. The State had a revenue surplus consistently since 2004-05, and its fiscal deficit has been consistently less than 3% of the GSDP since 2011-12. The Debt to GSDP ratio too has been consistently less than 20%, and this was one of the State’s eligible for borrowing more than 3% of the GSDP according to the Fourteenth Finance Commission recommendations. Of course, the State continued to limit its fiscal deficit below 3% of the GSDP. The State has also been transparent by including the off-budget borrowings in the total liabilities, and the Fifteenth Finance Commission has appreciated this.
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The voluntary vehicle scrappage policy, as announced in Union Budget 2021-22, has been rolled out with the idea of fulfilling the government’s manifold objectives of curbing pollution, improving vehicular safety and reducing oil import bills. Simultaneously, it is expected to catalyse demand for new vehicles and indirectly pave the way for promoting electric vehicles, the adoption of which is so far at the nascent stage. Direct incentives under the policy include a scrap value for old vehicle (ranging between 4-6% ex- showroom price of a new vehicle), 5% discount on the purchase of a new vehicle against the scrapping certificate and registration fee waiver.
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Skyrocketing oil prices have once again brought in the need to include petroleum products within the ambit of the GST. The Union Finance Minister recently made a case for its inclusion, and going by press reports, the finance ministers even of some opposition-ruled states are not averse to the idea, as long as their revenues are safeguarded. Besides the inclusion of petroleum product taxes within the ambit of the GST, there have been demands to rationalise GST rates to minimise the inverted rate structure and merge 12% and 18% to evolve into one general rate in addition to the merit rate of 5% and demerit (sin) rate of 18%. Thus, there are expectations that the 44 th Meeting of the GST Council scheduled this month would move in the direction of rationalising the GST structure.
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2021: The second advance estimate and third quarter estimate of GDP for FY21 released by the Ministry of Statistics and Programme Implementation (MOSPI) have brought in some recovery hopes. The estimate of 1% growth in GVA and 0.4% growth in GDP marks the ending of the recessionary phase. In fact, all the sectors except (i) mining and quarrying, (ii) trade, hotels, transport and communication services and (iii) public administration, defence and other services have recorded positive growth in Q3.
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India is globally the second largest sugar producer after Brazil, with the total output pegged at 27.2 MT during SS* 2019-20. The world has faced unprecedented circumstances during these pandemic times, and the sugar industry too has not been an exception to this situation. It witnessed subdued demand during the lockdown period because of reduced off-take from key customer segments such as HORECA (Hotels, Restaurants and Catering), beverage and confectionery. However, all is not gloomy for the sugar industry as price realisations have improved over the last few years. The government has also increased the Fair and Remunerative Price (F&RP) for sugarcane for the upcoming season to increase farmers’ revenues. Although the top sugar companies witnessed a dip in operational and financial performance during FY 2019-20, they appear to be gradually recovering in the current 2020-21 period.
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Union Budget 2021-22: A Filtered Assessment After the hype and hoopla following the budget, the dust has now settled, and the time is opportune to unravel its mysteries. Analysing the macroeconomic implications of the budgeted numbers and unravelling the implications of various proposals and initiatives taken in the budget for the current year and also the expected impact of the proposals in the next year is useful. The Economic Survey presented before the budget made an impassionate plea for adopting a countercyclical fiscal policy. It argued that increased capital expenditure is particularly important in the present juncture.
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Brickwork Ratings, Bangalore, 16 February 2021: The Government has announced modifications in the HAM concession agreement in November 2020 - Linking of interest rates to average MCLR of top 5 banks instead of Bank rates will offset the interest rate risk. This is expected to generate better stability of cash flows which will lead to lower volatility in DSCR and will also safeguard the return of the developers. The revision in the lock-in period to sell 100% equity post Commercial Operation Date (COD) from 2 years to 6 months is expected to deleverage the balance sheet and free up the equity earlier which will lead to increase in the investments in the road sector. The increase in the number of payment milestones to 10 installments of 4% each as against 5 installments of 8% each will enable the developers to improve working capital cycle and may postpone the availment of the debt.
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Stimulus measures announced by the government and the expansionary stance adopted in the budget are seen to be helping revive demand conditions, and the GDP contraction in H2FY21 is likely to be much lower than that estimated earlier. Given the faster-than- expected revival in economic activities so far, the hopes of economic recovery have somewhat brightened. However, the economy is still in the contraction mode and has already entered a recessionary phase in technical terms, with a contraction in two successive quarters.
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The most severe lockdown imposed following the spread of the Coronavirus-19 pandemic had rendered the last budget completely irrelevant. The government has had to provide emergency relief to save lives and livelihoods and provide stimulus to revive the economy. The fiscal stimulus was not large, but due to sharp decline in revenues and additional outlays needed for protecting lives and livelihoods have expected to increase the deficit and debt. Although the economy is in recovery mode, there are also hopes of continued support to recovery through elevated public spending in the coming year.
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This year’s Economic Survey is an impressive document covering a wide canvas. It has an extensive discussion on the spread of the Coronavirus-19 pandemic and performance of different countries in containing it. It also deals extensively with the impact of the pandemic on the Indian economy and government’s policy response. The survey expects a resilient V- shaped growth revival in consumption and investment to register robust real growth of 11% and nominal growth of 15.4% in 2020-21. This is in line with Brickwork Ratings projections. This high growth comes in the wake of a sharp contraction in 2020-21 at 7.7%, and despite this, the survey expects that the economy will take two years to reach and surpass the pre-pandemic GDP level. The survey also argues for a counter-cyclical fiscal policy, mainly by increasing public investment expenditures, which will have significant crowding-in effects on private investments.
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The Coronavirus (COVID-19) pandemic, which began spreading across world in late-2019, disrupted economic activities globally throughout 2020. To contain the virus spread, most countries imposed stringent lockdown measures in the first few months of 2020. India experienced one of the toughest lockdowns (imposed in March 2020) globally, bringing economic activities to a grinding halt and causing a sharp contraction in the GDP in two successive quarters of FY21, pushing the economy into a recessionary phase.
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Budget 2021-22: Setting Sail in the Rough Weather After a year of fear, despair and uncertainties, we seem to have entered 2021 with some measure of assurance and hope. With the recovery rate of COVID-19 cases in the country touching 97% and active cases on the decline, and with the search for the vaccine proving successful, we can finally see the light at the end of the tunnel. The economy is on the mend, as reflected in the better- than- expected growth performance in the Q2FY21. Both the industry and service sectors have shown recovery, with the PMI for manufacturing registering 56.4 in December.
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Low base effect and faster recovery in economic activities foretell better growth prospect. As per the first Advance Estimates (AE) of the GDP released by the Ministry of Statistics and Programme Implementation (MOSPI), the economy is expected to contract by 7.7% in FY21, which is close to our estimate of 7% to 7.5% contraction in GDP. Although these estimates are likely to undergo revisions, the projections in the second AE are likely to be revised upwards owing to the recent economic recovery reflected by the performance of some leading indicators.
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The Finance Ministry proposes to issue an order to impose a basic 40% customs duty on modules and 25% on solar cells as a part of Aatmanirbhar Bharat. The customs duty will replace the current 15% safeguard duty imposed on imports from China and Malaysia. India plans to impose the new tariffs on of solar cell and module imports from 1 April 2022.
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The better-than-expected second quarter (Q2) GDP estimate has raised the hopes of a faster recovery in the second half of the current fiscal (H2FY21). On 27 November 2020, the Ministry of Statistics and Programme Implementation (MOSPI) released Q2FY21 GDP data, wherein the contraction in the economy was estimated at a much lower 7.5%, compared with the 23.9% contraction in Q1FY21. With this, the contraction in H1FY21 stands at 15.7%.
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Better-than-expected GDP estimates in Q2FY21 brought some cheer in an otherwise gloomy scenario. Most forecasters, including the Reserve Bank of India (RBI) and multilateral agencies, had predicted the economy to contract by 9-13% in Q2, and the release of the estimate by the Ministry of Statistics and Programme Implementation (MOSPI) at -7.5% has beaten these expectations. A contraction of this order is still one of the highest among the major economies, and in normal times, it should have rung alarm bells.
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In a unanimous decision by the members of the Monetary Policy Committee (MPC), the RBI maintained status quo and continued with an accommodative policy stance in its fifth bi-monthly MPC meeting; this is in line with BWR expectations. The RBI also revised GDP projections upwards to -7.5% from the earlier estimate of -9.5%, considering the improved performance of the economy in the second quarter and the recent recovery seen in high-frequency indicators and urban demand.
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CPI inflation remained above the RBI MPC’s median target of 4% for the last 13 months and in October 2020, the inflation rate touched 7.61%, the highest since May 2014, largely due to the high rate of food inflation. Supply-side disruptions that were seen driving inflationary pressures since the imposition of the lockdown continued, despite the easing of lockdown restrictions. Price pressures are likely to be transient and are expected to ease gradually in the coming months if the economy normalises.
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With strong backward and forward linkages, the Steel industry serves as an engine for economic growth and a symbol of economic prosperity. With steel demand being derived from other sectors such as automobiles, constructions, infrastructure and machinery, its fortune depends on growth in these user industries. Since coal and iron ore are its main raw material, it highly depends on these industries as well.
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After seven months of severe stress triggered by the most severe lock down, there is some good news on the economy. A bountiful monsoon has brought cheer to the farmers, with a record output expected in the Kharif season. With reservoirs filled to the brim, output is expected to be bountiful in the Rabi season as well. Increasing purchasing power in the hands of the farmers is expected to increase rural demand. There has also been appreciable improvement in both manufacturing and service sector performances in October. The manufacturing PMI at 58.9 in October shows the fastest output increase in 13 years. The services PMI after eight consecutive months of contraction has moved into a positive zone, touching 54.1 in October compared with 49.8 in the previous month.
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Power Distribution Companies (Discoms) are usually considered weak links in the entire power value chain, with the grim situation of the country’s power sector being attributed to their poor performance, and rightly so. Despite the implementation of various reforms in the past few years, including the financial restructuring of Discoms during 2012-13 and UDAY during 2015-16, most Discoms have failed to improve their operational efficiencies and consequently, their financial performance. High distribution losses, low billing and collection efficiency, and a wide gap between the Average Cost of Supply (ACS) and Average Revenue Required (ARR) are some factors that have plagued the sector for a long time, leading to considerable losses.
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After six months of severe stress triggered by the severest lockdown so far, there finally is some good news on the economy. Some high-frequency indicators point towards economic recovery. The manufacturing PMI has shown a sharp increase from 52 in August to 56.8 in September, the highest in eight years! GST collections at Rs 95,480 crore in September have recovered to increase by 3.8% from last year and were higher than August collections by 10%. Passenger vehicle sale has increased by 31%. Railway freight traffic showed a 15% increase. After a gap of six months, merchandise exports registered 5.3% growth, driven by outbound shipments of engineering goods, petroleum products, pharmaceuticals and readymade garments.
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The economic damage caused by the lockdown imposed to contain Covid-19 spread manifested itself in the form of the sharpest contraction in the Q1 GDP estimates released on 31 August by the Ministry of Statistics and Programme Implementation (MOSPI). The GVA and GDP contracted by 22.8% and 23.9%, respectively, in Q1FY21. The contraction is the highest among the G-20 countries and emerging market economies.
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The first quarter GDP estimates released on 31 August by the Ministry of Statistics and Programme Implementation are clearly disappointing, although not entirely unexpected. The GDP contraction during the quarter was 23.9%, and the GVA shrunk by 22.8%. The strict lockdown implemented in the last week of March that continued until end-May has brought the economy to a grinding halt for the major part of the quarter. Even as lockdown relaxations have been slow and staggered, most metropolitan and large urban centres continue to be severely constrained in terms of economic activities.
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The report covers BWR view on the GDP growth, fiscal deficit, banking credit growth, asset quality, profitability, capitalisation of PSBs and some of the emerging trends in the banking space like digitisation and co-lending model. The report was launched in CII 13th Banking Colloquium held on 15th September 2020.
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The FY21 first quarter (Q1) GDP estimate released on 31 August 2020 by the Ministry of Statistics and Programme Implementation (MOSPI) clearly depicts the distress in economic activities caused by the lockdown that was implemented in response to the pandemic outbreak. For the first time, the economy has witnessed such a drastic contraction in the quarterly GDP. The grave concern is that these estimates may undergo further downward revisions, given the difficulties in securing real-time data, particularly that related to the unorganized sector, which was severely impacted due to various pandemic-related restrictions in the most part of the first quarter.
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In FY20, auto components players’ revenues declined ~8-10% after a y-o-y increase until FY19 on account of a shrinking order book from Original Equipment Manufacturers (OEMs) due to lower automobile sales in the country during this period. BWR expects the industry’s revenue to slip further and witness ~15%-18% decline in FY21 on account of lower income levels and continued weak sentiments. BWR expects export revenues to decline as well in FY21 as more than 50% of our exports are to markets in Europe, the UK and the US,
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The impact of the lockdown on economic activity shows up starkly in the trends in the Central government revenue collection during the first three months of fiscal 2020-21. As per data released by the Controller General of Accounts (CGA), the Central government’s revenue in Q1 of the current year is much lower than collections for the corresponding period last year. Revenue from income taxes (personal income tax and corporate income taxes) was lower by 30.5%, and the GST (CGST+IGST+UTGST) by almost 34% during the period.
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The Financial Stability Report (FSR) released by the RBI recently once again asserted, “The Indian financial system remains stable, notwithstanding the significant downward risks to economic prospects”. While this should provide some comfort, the downward risk arising from the vulnerability of Scheduled Commercial Banks (SCBs) in general and Public Sector Banks (PSBs) in particular is worrisome and needs to be addressed immediately. Their balance sheets were under severe strain even before the pandemic hit, and the crisis created by the pandemic and moratorium offered will explode when chickens come home to roost. According to the FSR, under a baseline scenario, the Gross Non-Performing Assets (GNPAs) would increase from 8.5% in March 2020 to 12.5% in March 2021.
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The Reserve Bank of India (RBI), as part of its monetary policy announcements today, has allowed banks to increase the permissible loan to value (LTV) ratio for loans to borrowers, against the pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent for all incremental lending upto 31 March 2021. This comes as a positive for individual borrowers as it provides an interim liquidity buffer to tide over the crisis related to the COVID-19 pandemic. It also increases collateralised retail lending avenues for banks that have been sitting on excess liquidity.
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Economic activity came to a complete standstill following the lockdown since 25 March, and a gradual resumption in economic activity was noted only after the lockdown was partially lifted. Several high-frequency indicators have reported marginal improvements since May on the back of the lockdown gradually being eased in several parts of the country. For instance, the PMI composite index, which fell to 7.2 points in April, showed some recovery in May and inched up to 37.8 points in June.
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It has been three years since the Goods and Services Tax (GST) was implemented with much euphoria. On the midnight of 1 July 2017, the GST was unveiled in the Central Hall of the Parliament and was hailed as a great initiative in cooperative federalism. The tax itself was unique in many ways. This is one of the few cases of subnational GST, and the only comparable experiments were in Canada, the European Union and Brazil. Sijbren Cnossen, an acknowledged expert on the subject, characterised the experiences in these countries as “the good”, “the bad” and “the ugly”. Canada demonstrated to the world that subnational Value Added Tax (VAT) in addition to the federal VAT is feasible.
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The Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs has started off well, with around Rs 1.2 lakh crore sanctioned and around Rs 62,000 crore disbursed as on 09 July 2020. State Bank of India, Canara Bank and Bank of Baroda are the largest lenders under this scheme, accounting for around 65 per cent of the overall disbursement until date. MSMEs in Tamil Nadu, Uttar Pradesh, Maharashtra, Gujarat and Karnataka have received the highest disbursements.
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Recent data on inflation trends points towards a softening movement in price levels in the wholesale price index (WPI), while the consumer price index (CPI) continues to stay at elevated levels, particularly in the food segment. Even before the lockdown was announced, food inflation remained higher in both, the WPI and CPI. This was mainly due to the supply constraint arising from crop damages caused by excessive and unseasonal rains. This hit in supplies has been causing an increase in the prices of most food items, such as vegetables, fruits and pulses. In December 2019, inflation in the consumer food price index (CFPI) peaked to 14.2%, and that in wholesale food price index (WFPI) stood at 11.2%.
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The lowering of the credit period enjoyed by corporates from their MSME suppliers/vendors will ease liquidity pressure on MSMEs.- Liquidity challenges faced by medium, small and micro enterprises (MSMEs) in the past two years aggravated further in the first quarter of fiscal 2020 due to the Covid-19 impact on the Indian economy.
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The growth estimate released by the Ministry of Statistics and Programme Implementation (MOSPI) brings into focus some stark and worrisome realities. Firstly, at 4.2%, GDP growth in 2019-20 has been the lowest in 11 years. Secondly, there was sharp and steady deceleration in growth from 5.2% in the first quarter (Q1) to 3.1% in the fourth quarter (Q4). Thirdly, the economy showed sharp deceleration in growth even before the lockdown was announced in the context of COVID-19, and it only exacerbated this decline. Fourthly, deceleration in growth was witnessed in all sectors except agriculture, mining and quarrying, and public administration and defence. The sharpest decline was in the construction sector from 5.3% growth in the Q1 to (-)2.3% - in the Q4, followed by the manufacturing sector from 4% in Q1 to (-) 1.4% in Q4. The contraction in the manufacturing and construction sectors highlights an underlying weakness in the economy.
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The GDP data released on 29 May by the Ministry of Statistics and Programme Implementation (MOSPI) is disappointing. The fourth quarter GDP is estimated at 3.1%; and with substantial revisions in the estimate for earlier quarters, the full-year growth estimate for fiscal 2020 has been revised downwards to 4.2%, which is the lowest in the last 11 years. The estimates are confusing as much as they are disappointing. First, the substantial revisions make the job of estimation very unpredictable. Second, the trend in quarterly data shows that the economic slowdown has been sharp and steady, indicating that the policy response has not been effective. Third, there was a sharp downturn in the economy even before the COVID-19 crisis, and the lockdown has only exacerbated it.
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The Reserve Bank of India (RBI), post its Monetary Policy Committee (MPC) meeting today, announced the second set of regulatory measures (first set announced on 17 April 2020) to safeguard India Inc. from the impact of COVID-19. BWR believes most announcements made today will largely address the working capital challenges of corporate India in the near term. It will also provide sufficient liquidity to resume operations, with the nationwide lockdown being lifted in a phased manner. However, the announcements fall short of incentivising the banks to increase the pace of domestic credit. BWR believes the reverse repo rate cut should be much higher than the repo rate cut to discourage banks from parking their excess funds with the RBI.
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The Government of India (GoI) and Reserve Bank of India (RBI), over the past two months, have announced critical measures to help revive the domestic economy from the impact of the COVID-19 pandemic and pump in a series of liquidity boosters into India Inc. This includes the most recent and major announcement of the “Aatmanirbhar Bharat Abhiyan” package announced last week, which covers a majority of the Indian economy.
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In the fourth tranche of the Rs 20 lakh crore special economic package titled Aatmanirbhar Bharat Abhiyaan, created as a response to the Covid-19 crisis, the Finance Minister announced a combination of measures to support eight sectors i.e. coal, minerals, defence, aviation, power discoms, social infrastructure, space and atomic energy. These are termed as new horizons of growth.
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Of the seven announcements made by the Union Finance Minister in the fifth tranche of the Rs 20 lakh crore special economic package called the Aatmanirbhar Bharat Abhiyaan, the most significant one was regarding an increase in the borrowing space for state governments to fight against the COVID-19 crisis. The central government has permitted states to increase their borrowing limits from 3% to 5% of the GSDP for 2020-21. In fact, the Fifteenth Finance Commission, in its terms of reference, was asked to consider “the conditions that the Government of India may impose on states while providing consent under Article 293 (3) of the Constitution”.
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In the second tranche of the Rs 20 lakh crore special economic package called the Aatmanirbhar Bharat Abhiyaan as a response to the COVID-19 crisis, the Finance Minister announced a combination of measures to support poor migrants and small farmers. Many of these measures are an extension of the benefits of measures announced earlier and a part of the 17 April 2020 announcement. Even though, the government has given special attention to the disadvantaged and vulnerable migrant workers and small farmers to minimise suffering on account of the COVID-19 pandemic and provide them relief to rework on their livelihoods.
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In the first tranche of the Rs 20 lakh crore special economic package titled Aatmanirbhar Bharat Abhiyaan, created as a response to the Covid-19 crisis, the Finance Minister announced a combination of measures to support small enterprises (MSMEs), NBFCs, housing finance companies, microfinance, power distribution companies, contractors and developers. These measures will certainly provide relief especially to the MSME sector to overcome the crisis.
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The partial relaxation from the lockdown in the Indian economy has brought in new challenges. The classification of districts in the country in terms of red, orange and green zones and some relaxations in the orange and some more in the green zones have helped in the limited resumption of economic activities. However, economic activities are concentrated in urban agglomerations, and virtually all of them are in the red zone, where not much activity is permitted. With livelihoods lost, an uncertain future and little reserves to fall back on, millions of migrant workers are understandably impatient, and even as they know about the bleak fortunes, are keen on going back to their roots. Besides the logistic nightmare of transporting them, this may start another wave of the virus spreading in areas not having witnessed the spread so far.
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The RBI announced a slew of measures today to support the Indian financial system in mitigating the impact of Covid-19. These measures offer considerable relief to India Inc., especially non-banking financial institutions, in terms of liquidity and credit availment. However, the RBI has also stipulated banks to create a 10% provisioning on all loans that, are overdue but not yet a non-performing asset and; wherein the moratorium has been approved. Banks categorise such loans as special mention accounts (SMA) wherein loans are in the 0-90 days overdue buckets.
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Time to abandon fiscal consolidation to revive crippled economy The COVID-19 pandemic has shattered the nations confidence. There is no clarity on how long it will take for the nation to emerge from this crisis and how much damage it will inflict on the economy. We, in our living memory, have not seen lives and livelihoods being lost at such a large scale before, and this is shattering our confidence. The complete lockdown of economic activity at such a time when investment activity in the economy has been slowing down not only brings in considerable hardship and misery, but also makes recovery much more difficult.
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The increase in the Ways and Means Advances (WMA), the overdraft limit to the States and Union Territories (UTs) by the Reserve Bank of India (RBI) by 30% has not come a day sooner. The States are struggling with serious cash flow problems due to the lower revenue realisations from their own taxes, as well as from the Central tax devolution. At a time when they need all the resources to fight the COVID-19 crisis in terms of expanding the significantly stretched healthcare facilities and provide relief to a large number of vulnerable sections, the cash crunch has posed severe challenges in a number of States.
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Coronavirus disease (COVID-19), declared a
pandemic by the World Health Organisation (WHO), has become a full-blown crisis globally,
including in India. As a containment measure, to avoid the spread of the disease, most countries
have imposed a lockdown; the Indian Government on 24 March 2020 also announced a 21-day
nationwide lockdown. As per Brickwork Ratings (BWR), this has the potential to create a huge
economic disruption, increase pressure on Corporate India and impact their credit profiles. BWR
is closely monitoring the unfolding domestic situation and impact on its rated companies.
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The Reserve Bank of India (RBI) convened its Monetary Policy Committee (MPC) meeting well before its scheduled date of 3 April 2020, considering the urgency of intervention in the wake of severe uncertainty caused by the COVID- 19 outbreak. The RBI deserves to be complemented for its comprehensive intervention in advancing an accommodative monetary policy, ensuring adequate liquidity and creating greater clarity through regulatory forbearance. The major announcements by RBI MPC include a 75 basis points (bps) cut in the repo rate to 4.4%, cut in reverse repo by 90 bps to 4%, and the widening of the LAF corridor from 50 bps to 65 bps, in addition to continuing the accommodative monetary policy stance.
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COVID-19 has posed the mother of all challenges. Besides containing the spread of the virus and protecting people lives, the government has to provide to sustain livelihoods by ensuring adequate liquidity and making cash transfers. It is not clear how long this problem will last; as and when the pandemic recedes, there would be major challenge of reconstruction. Meanwhile, in keeping with the promise of the RBI Governor that the RBI will do whatever it takes, it is reasonable to expect a sharp reduction in the borrowing costs.
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Debt market yields have spiked by 30–64 basis points in March as investor confidence is hit by the current outbreak of the coronavirus pandemic (declared a pandemic by the WHO). The rapid spread of the virus has propelled governments and central banks globally to provide multiple stimulus packages, leading to rising costs and higher-than-earlier-envisaged fiscal deficit. Government borrowings and inflation will also increase, along with bond yields, going forward.
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We expect growth in Housing Finance Companies (HFCs) to rebound to double-digit figures in fiscal 2021 to ~10-12% after a difficult fiscal 2020, wherein loan growth is estimated to be as low as 2%. Funding impairment and a slowdown in housing sales skewed demand for mortgage loans in the past 18 months. The spurt in loan growth in the next fiscal will depend on HFCs successfully redefining their business model to include increased levels of co-lending with banks and continuing the steady pace of loan securitisation, while reducing reliance on short-term borrowings.
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Today press conference held by the RBI Governor to announce matters pertaining to the restructuring of Yes Bank and measures to counter the COVID-19 fallout is timely. It was mainly intended to assure the depositors of Yes Bank that their deposits are safe, the restructuring of the bank is well under way and that the RBI will do whatever it takes to ensure this happens. The announcement of an additional rupee-dollar swap is to stabilise the foreign exchange market and the additional Long-Term Repo Operations (LTRO) of Rs 1 lakh crore is to ensure adequate liquidity in domestic markets.
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The prevailing economic climate does not bring much cheer. The third quarter estimates show continued slide in the GDP growth estimated at 4.7%, and as there are no indicators yet to show a turnaround, it is doubtful whether the second advance estimate of growth for the current year at 5% can be realised. In addition, the unclear consequences of unprecedented spread of COVID-19 epidemic brings in a lot of uncertainty..
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The long-term repo operations (LTRO) conducted so far, in batches of INR 250 billion each aggregating to INR 750 billion by Reserve Bank of India (RBI), has turned out to be a giant step among the strategic smart moves taken by the Central Bank for achieving multiple objectives.
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Liquidity boosting measures to accelerate rate transmission and boost credit demand Budget proposals and the RBI’s liquidity boosting measures, coupled with previously announced government measures, are expected to bring the domestic economy on an improved growth track in fiscal 2020.
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The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has maintained the policy repo rate at 5.15%, also maintaining an accommodative stance with a view to revive growth and ensure inflation remains within target. The unchanged rate and stance are both in line with BWR expectations.
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Even as there are expectations of a moderation in inflation from the elevated level of 7.35% in December 2019, the Monetary Policy Committee (MPC) of the RBI islikely to maintain the policy repo rate at 5.15% in the upcoming monetary policy meeting to be announced on 6 February 2020. We anticipate the slump in GDP growth has bottomed out to 5% in 2019-20 and expected to rebound in 2020-21 to 5.5-6%, aided by the government measures and the transmission of past rate cuts.
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In depth Analysis and Credit Impact on Various sectors.
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The revision in investment limit under Voluntary Retention Route (VRR) to INR 1.5 trillion from earlier limit of INR 750 billion, announced by Reserve Bank of India, is a big positive for debt market as availability of on tap investment facility with first come first serve basis will boost the foreign flows in India at the right time which the nation needs in a bid to shore up its economy. Also, the minimum retention period of 3 years will further help to stabilize the economic situation on the back of voluntary commitment to retain a minimum percentage (75%) of investments for a definite period.
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BWR expects Union Budget to provide a boost to Investments and Savings The Union Budget 2020-21, to be presented on 1 February 2020, is expected to announce appropriate measures to restore the economic growth and to set a clear roadmap for achieving the ambitious USD 5 trillion economy by 2025. Amidst the current slowdown in the economy evident from the 11-year low GDP estimates of 5%, the approach to the economic policy for the next year needs to be genuine and realistic
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CPI inflation at 5.5 years high, Crosses MPC's upper band target of 6% for the first time since 2016 As per the provisional estimates on CPI inflation released by MOSPI on 13 January 2020, the Consumer Prices Index (CPI) registered an increase of 7.35% for December 2019, on account of sharp uptick in food price inflation led by increase in the prices of vegetables and pulses.
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Governments measures and Monetary easing by RBI expected to reverse the economic slowdown in 2020 The domestic economy may see a moderate improvement in GDP in the next fiscal, supported by Government measures. Muted manufacturing activity hit by slowdown in automobile sector led the slowdown in the GDP to hit 4.55% in Q2 2019-20, the lowest in last 26 quarters
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