Covid-19 induced lock-down to dampen investment scenario: Study

A countrywide lockdown imposed till April 14 to counter the impact of the deadly Coronavirus is slated to dampen the investment scenario. Adding to the woes of a slump in domestic GDP growth, the recent outbreak of Covid-19 and its snowballing into a major global health crisis is bound to have ramifications on India’s future investments, a study noted.

India is already in the throes of a bleak investment scene. Four out of the six parameters- investment rate, bank credit offtake, industrial production of capital goods and new investment projects are pointers to deteriorating investment scenario even though investment intentions and market borrowings have shown some signs of resilience.

“It needs to be kept in mind that the last two months of FY20 have been marked with Coronavirus related shutdown in economic activities which will add to the existing investment stagnation. Thus, these parameters are likely to see a downward revision”, the report by CARE Ratings noted.

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Quoting figures from the Ministry of Statistics & Programme Implementation (MoSPI), the study observed that the investment rate measured as Gross Fixed Capital Formation (GFCF) as a percentage of GDP, a barometer of investment demand, tumbled to nearly two-decade low. As per the second advance estimates, it is seen at 27.5 per cent of the GDP. Compared with a year-ago period, the investment rate was 1.5 per cent lower than 29 per cent of GDP in FY19.

Bank credit offtake, too, remained subdued in FY20. Incremental bank credit until the middle of March stood at 3.8 per cent, nearly a third of 10.8 per cent in the comparable period of last financial year. The year-on-year (y-0-y) growth in bank credit (as on March 13) was 6.1 per cent, less than half of 14.5 per cent growth in the period under review. Bank credit disbursements have remained muted in FY20 due to overhang of NPA (Non-Performing Assets) issue in the banking system, liquidity crisis in the NBFC (Non Banking Financial Companies) segment and increased deleveraging activities by corporate.

Between April and February of this financial year, the industrial sector has seen contraction in incremental bank credit growth by 2.4 per cent as against the 1.9 per cent growth noticed in the corresponding period of 2018-19.

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For the first time in five years, capital goods registered a contraction in production of capital goods. Capital goods index fell sharply by 11.6 per cent during April-January of FY20 compared to 5.7 per cent growth registered in the same period of last fiscal. Deceleration in capital goods was led by dip in commercial vehicles segment. In the backdrop of auto sector slowdown, production of commercial vehicles contracted by 26 per cent during April-January, also exerting pressure on production of auto ancillaries.

Reviewing the macro investment ambience, the study said that new investments in various projects fell by 10 per cent to Rs 9.1 trillion between April and December of FY20 compared with Rs 10.1 trillion logged in the year ago period. Services sector accounting for 40 per cent share in new projects contracted four per cent y-o-y.

In its prognosis, the study commented, “Recovery of investment in the short term is not likely. Since mid-January 2020, Novel Coronavirus pandemic has led to disruptions in the economic activities globally. Domestic activities were already constrained on account of disruptions in the global supply chain and were further impacted post announcement of lockdown in the country. This could dampen investment scenario in FY20”.

Experts peg India's Covid-19 lockdown cost at $120 bn, call for relief plan

Pegging the cost of the Covid-19 lockdown at $120 billion (approximately Rs 9 trillion) or 4 per cent of the GDP, analysts on Wednesday sharply cut their growth estimates and stressed on the need to announce an economic package.

The Reserve Bank of India (RBI), which is scheduled to announce its first bi-monthly policy review on April 3, is set to deliver a deep rate cuts and it should also be assumed that the fiscal deficit targets will be breached, analysts said.

Prime Minister Narendra Modi announced a three-week complete lockdown of the country to prevent the spread of the coronavirus infections in the country. The equity markets were in the red early into the trade on Wednesday, down 0.47 per cent.

We estimate that the cumulative shutdown cost around $120 billion or 4 per cent of the gross domestic product (GDP), British brokerage Barclays said in a note, revising down its FY21 growth forecast by 1.7 percentage points to 3.5 per cent.

It specified the cost of the three-week nationwide lockdown to be alone at $90 billion, which is over and above the lockdowns announced by various states like Maharashtra earlier.

They also said that the RBI is most likely to go for a 0.65 per cent rate cut in the April review and will slash interest rates further by 1 per cent during the course of the year.

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Domestic brokerage Emkay congratulated policymakers for acting earlier than other countries, but rued that there is not much to cushion the economic impact.

The Indian government has so far been largely silent on the economic impact from the lockdown, leave alone any measures to cushion the hit, it said.

The unorganised sector, which is already reeling under the twin impact of demonetisation and goods and services tax (GST), will be pushed to the brink because of these measures, Emkay warned.

It suggested soft loans to smaller businesses, loan restructuring and cash transfers as the possible tools the government can adopt as part of the economic package.

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Edelweiss said, India so far lags peers in a policy response to the crisis, which has been limited to liquidity support, installing a task force and some spending measures by states.

India needs a lot more, it said, pointing out that there's plenty of monetary room but little option on the fiscal front.

Finance Minister Nirmala Sitharaman, while announcing some measures to help the economy on Tuesday, had hinted that an economic aid package is in the making.

Analysts at Barclays said the government will most likely invoke the cause for natural calamities under the fiscal prudence framework in FY21 and estimated the fiscal deficit to come at 5 per cent of GDP versus the 3.5 per cent budget target.

Cash is still king in India, but digital payments rising sharply: RBI

Cash is still king in India, but there has been a perceptible shift in favour of digitisation in recent years, according to an internal study of the Reserve Bank of India (RBI). Having a high currency in circulation (CIC) relative to gross domestic product (GDP) is a good indicator of cash being highly preferred for payments. Based on this assumption, “India continues to have a strong bias for cash payments," the study noted.

Demonetisation and an active growth in GDP brought down the cash in circulation as a percentage of GDP to 8.70 per cent in 2016-17. This increased to 10.70 per cent in 2017-18 and to 11.2 per cent in 2018-19 which, however, is less than the pre-demonetisation level of 12.1 per cent in 2015-16.

“The rate of increase is lower, indicating a perceptible shift away from cash,” the report said.

The notes in circulation (CIC minus coins in circulation) increased at an average rate of 14 per cent between October 2014 and October 2016.

Assuming the same growth rate, notes in circulation (NIC) would have been Rs 26 trillion in October 2019. NIC, however, was Rs 22.3 trillion, indicating that digitaisation and reduction in cash usage helped reduce NIC by over Rs 3.5 trillion, according to the report. However, the cash withdrawals from ATMs increased over the past five years.

“India is next only to China in terms of the cash. However, the percentage of cash withdrawals to GDP has been constant in India at around 17 per cent,” the report said, adding, with a compound annual growth rate (CAGR) of 9 per cent in terms of

volume and 10 per cent in terms of value, the growth in cash withdrawals has been slow when compared to digital payment transactions, which grew at a CAGR of 61 per cent and 19 per cent in terms of volume and value, respectively. This indicated a shift towards digitisation.

Thus, “in India, like in many parts of the world, cash is the well-established and widely used payment instrument. It is, however, reassuring that non-cash payments, especially those using electronic or digital modes, are rapidly increasing.”

Mining sector's GDP share sees decline due to disruptions in Goa, Karnataka

The contribution of mining sector to the country's GDP has been on a steady decline primarily on intermittent disruptions in operative mines in the key producing states of Odisha, Karnataka and Goa.

From a share of 1.93 per cent in FY13, the mining sector's contribution to the GDP has substantively declined to 1.63 per cent in FY19. The share of mining sector to India's GDP is woeful compared with South Africa (7.5 per cent) and Australia (6.99 per cent).

Closure of mines and disruptions due to changes in legislations has thrown the sector out of gear, curtailing production and endangering jobs. An analysis by the Federation of Indian Mineral Industries (Fimi) reveals that despite its immense employment potential, the mining sector has witnessed massive job losses. The combined job losses both direct and indirect, as a fallout of mining bans in Karnataka and Goa is pegged at 1.28 million. In 2011, 166 mines in Karnataka concentrated in Bellary, Chitradurga and Tumkur, had faced shutdown. Goa has faced a total closure in mining operations since March 15, 2018 after a sweeping order of the Supreme Court declared operations of 88 mines working under the 'deemed extension' clause illegal. Likewise, in Odisha, scores of mines found it profoundly difficult to sustain operations after the apex court ordered payment of hefty compensation worked out by the SC-appointed central empowered committee (CEC). Mine leaseholders in Odisha were asked to pay up Rs 17576 crore for overproduction beyond the approved statutory limits.

Mining sector boasts of the highest employment elasticity after construction (1.13 per cent) and real estate (0.66 per cent). With an employment elasticity of 0.52 per cent, mining has the potential to create 13 times the jobs created by agriculture and six times over manufacturing for every one per cent growth in GDP.

Another appalling trend is the escalating imports of minerals since 2014-15. At the end of 2017-18, imports of minerals and metals excluding coal and gold were valued at Rs 4.91 trillion, four times over the domestic production worth Rs 1.12 trillion.

India is a net importer of an array of minerals - copper ores and concentrates, platinum alloys, nickel ores, diamond, gold, tungsten ores & concentrates, asbestos, flourspar, cadmium, silver, molybdenum, rutile, coal, graphite and others. The country has 100 per cent import dependence on copper ores and concentrates, platinum alloys, nickel ores, diamond, gold and tungsten ores & concentrates.

Despite being endowed with a repository of minerals, India has not been able to tap the potential wealth. India ranks among the least explored countries compared to other leading resource rich nations and mining jurisdictions. Only 10 per cent of the country's Obvious Geological Potential (OGP) has been explored of which a measly 1.5 per cent is mined.

In terms of exploration spending too, India occupies the lowest rungs in the pecking order dominated by Chile, Australia, Canada, United States, China and Brazil. Data by Fimi shows that in FY16, FY17 and FY18, India incurred Rs 13 crore, Rs 15 crore and Rs 17 crore respectively on mineral exploration.

China and the West race to the top

Over the last 25 years, the relative growth rates of the world’s major economies have changed dramatically. Six developing countries in particular —China, South Korea, India, Poland, Indonesia, and Thailand — have grown extremely fast during this period. The rich G7 countries, on the other hand, have experienced slowing rates of labour productivity growth, and their combined share of world gross domestic product (GDP) has fallen from two-thirds to one-half.

Neoclassical growth theory, which has dominated economic thinking over this period, has not been able to explain this reversal of fortunes. For anyone who has watched South Korean and Chinese firms triumph in one world market after another, it is difficult to believe that Western countries will be able to compete more effectively in the future simply by making their own markets more efficient.

If the developed world is to boost its competitiveness, we in the West need to embrace some new economic thinking. That means gaining a better understanding of the growth process, and using this knowledge to develop policies that can help accelerate it. Moreover, we should not think that we can acquire this knowledge by building ever more complex and unrealistic mathematical models.

A good place to start is with the measurement of national wealth, and the fact that a country’s GDP per capita is simply the sum of the value added per capita of all its economic organisations, mainly firms.

We then need to ask how firms increase their value added per capita. In the observable world, rather than the world of perfect competition embraced by neoclassical economists, companies can do this in two ways. They can increase their production efficiency, as Henry Ford did when he started using an assembly line to manufacture cars, or increase the competitive advantage of their products, as Steve Jobs did when he developed Apple’s iPhone.

Both Ford and Jobs increased the competitiveness of their firms by innovating. Countries like China and Singapore have done the same, helped along by lessons from more advanced economies. Both have declared themselves to be innovation nations, and have put innovation at the heart of government policy.

Western countries, therefore, need to understand three things in particular. First, they must increase their rates of innovation in order to compete better against fast-growing emerging economies. That will require them to develop policies that strengthen national systems of innovation, education, and training, and improve the governance and financing of their firms. Municipal- and regional-level policies should support these goals.

Second, the West needs to understand that there is a global ladder of economic development, the rungs of which represent increasing levels of organisational and technological complexity, and value added per capita. It is difficult for any firm to gain a competitive advantage in activities such as manufacturing cheap clothes and assembling electronic components, resulting in low value added per capita, and thus low wages and salaries. By contrast, companies in industries such as aerospace and pharmaceuticals can build up significant competitive advantages, leading to high value added per capita and consequently high wages and salaries.

Developing countries are rapidly moving up the ladder, and are increasingly competing directly with developed economies. The latter therefore must innovate rapidly both to increase the value added of their current industries, and to move into new high-value-added sectors.

Finally, Western firms and policy-makers should understand that their countries’ competition with China and other rising economic powers is now a “race to the top,” not a “race to the bottom” in which cheap labour and a “favourable” exchange rate are seen as the best ways to achieve and maintain competitiveness.

If developed countries can move further up the ladder of economic development by innovating and creating new high-value-added products and services while ceding lower value-added areas of activity to developing countries, then all can increase their national standards of living at the same time. If the pie is larger, everyone can have a larger slice.

To be sure, macroeconomic stability and efficient markets, which lie at the heart of neoclassical economic thinking, remain essential conditions for growth. But they do not drive it. If we in the West want to compete effectively against China and other fast-growing Asian countries, we need to understand that innovation is the engine of growth, and governments need to make it central to their economic policies.

GDP to grow by 5.5% in FY21 but downside risks persists: India Ratings

India's growth rate is expected to be marginally higher at 5.5 per cent in 2020-21 against the estimated 5 per cent for the current fiscal on the back of strong policy push coupled with revival in demand, a report said.

Citing an NSO report, India Ratings and Research (Ind-Ra) said said the slowdown is a combination of several factors including an abrupt and significant fall in lending by non-banking financial companies close on the heels of a slowdown in bank lending and reduced income growth of households coupled with a fall in savings and higher leverage.

Although some improvement in FY2020-21 is expected, these risks are going to persist, India Ratings and Research principal economist Sunil Sinha said.

As a result, the Indian economy is stuck in a phase of low consumption as well as low investment demand, it said.

"A strong policy push coupled with some heavy lifting (even if this requires using the escape clause as suggested by the FRBM Review Committee headed by N K Singh) by the government is required to revive the domestic demand cycle and catapult the economy back into a high growth phase," it said.

The government has announced a slew of measures recently to prop-up the economy, but Ind-Ra believes they will come to aid only in the medium term.

The shortfall in the tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6 per cent of GDP (budgeted 3.3 per cent) in FY2020, even after accounting for the surplus transferred by the RBI, it said.

"A continuance of low GDP growth even in FY'21 means subdued tax revenue and limited room for stepping-up expenditure. Ind-Ra believes the government will have to construct the FY21 budget in a way that expenditure is rationalised and prioritised and all avenues of revenue generation are tapped," it said.

While rationalising, the focus of expenditure has to be on creating direct employment and putting more money in the pockets of the people at the bottom of the pyramid, it said, adding since their marginal propensity to consume is close to one, they are likely to spend what they receive.

"This will support the consumption demand. Therefore, budgetary allocation to heads such as rural infrastructure, road construction, affordable housing and MNREGA must be prioritised and allocation for non-merit subsidy/expenditure less critical for growth be rationalised," it said.

Also, gross fixed capital formation (GFCF) has become government dependent, as incremental private capex has been down and out, it said, adding, despite the fiscal constraints, the government has not shied away from infrastructure spending in the past and even resorted to fund them through extra budgetary resources.

Ind-Ra, therefore, believes the government will continue to focus on infrastructure spending and leverage all possible options - budget, off budget including National Infrastructure Investment Fund, it said.

Also, since a larger part of the government capex now takes place at the state government level, it will be important to keep a tab on the state government capex as well, it added.

With regard to inflation, it said, retail and wholesale inflation expected to be 3.9 per cent and 1.3 per cent, respectively as compared to 4.4 per cent and 1.4 per cent in the current fiscal.

Though oil prices are stable, retail food inflation after remaining subdued and in single digit for 70 months since January 2014, entered into double digits in November 2019 and accelerated to 14.12 per cent in December 2019, it said.

This means, in the near term, further monetary easing is ruled out and we may have to brace for an extended pause on the policy rate, it added.

While observing that external environment continues to be challenging for exports due to the trade friction and protectionist policy pursued by many developed economies, it said, as a result, exports of goods and services are likely to witness negative growth of 2 per cent the current fiscal.

"With some breakthrough in the US-China trade talks, Ind-Ra expects external environment to improve somewhat in FY21. This is likely to help India's exports of goods and services to grow by 7.2 per cent and the current account deficit to decline marginally to $32.7 billion, 1.1% of GDP in FY21 (FY20: $33.9 billion, 1.2% of GDP)," it said.

In view of these developments, Indian rupee is expected to average 73 against the dollar in FY'21, it said.

Economy resilient, no cause for apprehension on decline in GDP: Govt

Indian economy is resilient and there is no cause for apprehension on decline in GDP with a slew of steps directed at boosting it, Union Minister Rao Inderjit Singh said on Thursday.

"The economy grew only at 4.5 per cent in the second quarter of this year... It is also true that in the past five or six years this is the lowest growth of the GDP...But I would also suggest that this is not a cause for apprehension and there are precedents before this in various years when the economy has gone down even further than 4.5 per cent...but it bounced back," Statistics and Programme Implementation Minister Singh said in the Rajya Sabha.

Replying to a supplementary during Question Hour in the Upper House Singh said: "The Indian economy is resilient as such and I don't think there is any cause for apprehension".

In reply to another supplementary, he said the demand and supply system is not as good as it should have been.

"Farming is one sector where the economy has been suffering but I would just like to say that the International Monetary Fund and other multi-lateral organisations continue to underline a positive outlook on Indian economy and ... I am sure that the economy in the coming months and years would improve," he said.

The minister said the government has been undertaking various measures to boost GDP growth.

Introduction of Insolvency and Bankruptcy Code (IBC) in 2016 is directed towards strengthening the financial system of the country, he said and added, implementation of Goods and Services Tax in 2017 is an important measure for rationalisation of tax structure and improving ease of doing business.

He also said that continuous liberalisation has led to an increase in inflows of foreign direct investment into the country.

In addition, the government has cut corporate tax rate from 30 per cent to 22 per cent to boost investment activity, he added.

Stating that the corporate tax rate for new domestic manufacturing companies has been cut to 15 per cent - which is amongst the lowest in the world, he said the Reserve Bank of India has reduced the repo rate by 135 basis points during 2019 and it also mandates banks to link their lending rates with external benchmarks for reducing the cost of capital for investors.

"Government has approved a realty fund worth Rs 25,000 crore for stalled housing projects. Government has also extended PM Kisan scheme to include all farmers, which will boost rural consumption. To boost exports, Government has undertaken number of measures, inter-alia, extending the scheme of reimbursement of taxes and duties for export promotion replacing Merchandise Exports from India Scheme (MEIS) to incentivize exporters, fully automated electronic refund for Input Tax Credits in GST and revised priority sector lending norms for exports credit," he said.

The minister said the Union budget 2019-20 provides a push to infrastructure development with the intention to invest Rs 100 lakh crore in infrastructure over the next five years and also by restructuring National Highway Programme.

Scheme of Fund for Upgradation and Regeneration of Traditional Industries (SFURTI) has been started to facilitate cluster based development to make the traditional industries more productive, profitable and capable for generating sustained employment opportunities, he added.

GDP growth numbers: Will there be some good news?

GDP data is slated to be released today, in the evening. This comes soon after Finance Minister Nirmala Sitharaman's statement in the Rajya Sabha where she said that the country was not in recession yet, and won’t ever be.

However, a set of data arriving today may qualify the statement to some extent. As, the Ministry of Statistics and Programme Implementation (MoSPI) will release the data on gross domestic product (GDP) for the July to September quarter of the fiscal year 2019-20 (Q2FY20) today.

The upcoming data will likely show the economy had its weakest performance last quarter in more than six years, with the growth rate dropping below the symbolically important 5% mark.

It’s a culmination of several months of downbeat figures, from plunging car sales to shrinking factory output and an export slump.

Why in India, 6% Economic Growth Is Cause for Alarm?

India's economy probably expanded at its weakest pace in more than six years in the September quarter, a Reuters poll showed, as consumer demand and private investment weakened further and a global slowdown hit exports.

The median of a poll of economists showed annual growth in gross domestic product of 4.7 per cent in the quarter, down from 5.0 per cent in the previous three months and 7 per cent for the corresponding period of 2018.

That would be the slowest pace since the March quarter of 2013.

Besides, India was the world’s fastest-growing economy until last year, posting quarterly growth rates of as high of 9.4% in 2016.

What is the government's take on it?

Q2 FY20 GDP growth likely to dip to 4.9% over sustained slowdown: NCAER

The country's GDP growth is likely to decline to 4.9 per cent in the second quarter of this fiscal due to sustained slowdown in virtually all the sectors, economic think-tank NCAER said on Saturday.

India's economy grew at 5 per cent in the first quarter of 2019-20 -- the slowest pace in over six years.

For the full fiscal 2019-20, the Delhi-based National Council of Applied Economic Research (NCAER) has pegged GDP growth at 4.9 per cent as against 6.8 per cent in 2018-19.

Going forward, NCAER said the monetary policy measures are unlikely to revive growth at this juncture and suggested providing fiscal stimulus, which too can be challenging unless it can be financed through better revenue generation.

"Whether the growth deceleration may be bottoming out or not, we will know in next two weeks based on the Q2 growth figures of the government. However, the current poor growth is mainly due to a demand problem. It can be addressed through fiscal measures," NCAER Distinguished Fellow Sudipto Mundle told PTI on the sidelines of its event on 'Mid-year review of the economy'.

Emphasising that the focus should be on fiscal measures, Mundle said there is a need to pump up expenditure without pushing up the fiscal deficit.

There are ways of doing it, he said, adding, "We have a bold leader. There is a huge fiscal space which has not been used. It is myth that some say there is no fiscal space."

Mundle said that revenue foregone is 5 per cent of the country's GDP and about 1.5 per cent of GDP is locked up as excess appropriation of the budget which has not been spent. Even the government is not paying the bills, he said.

"So, there is a lot of fiscal space, but you need take tough measures. First of all, we need to reduce exemptions on indirect tax custom duties. There was no need to reduce corporate tax. Are companies investing after that? This makes the position worse," he added.

Earlier, while presenting the mid-year review of the economy, NCAER Senior Fellow Bornali Bhandari said currently the world economic growth is at its lowest since the global financial recession in 2008. India is also experiencing a decline in growth, which is sharper than the global slowdown.

 

"We have projected 4.9 per cent GDP growth for the Q2 of this fiscal based on the 'nowcasting model' with error margin of 1 per cent. For the full fiscal, the GDP (growth) is pegged at 4.9 per cent," she said.

The government's projection, which is expected to be released by the month-end, should be between 4.4 and 4.9 per cent for the Q2 of this fiscal, she added.

Observing that the sharp decline in growth reflects a slowdown across virtually all sectors, Bhandari said there has been deceleration in all the drivers of demand.

"Exports of goods and services have fallen since Q2 of 2018-19 fiscal to 1.9 per cent, that means there has been no external demand. Investment demand and business sentiment are falling mainly because of demand reasons. The government is not in a position to expand expenditure. Where is the demand? The challenges are various and therefore we see dismal growth in Q2 and for full year," she said.

After having peaked at 8.1 per cent in Q1 of 2018-19, the country's GDP growth has persistently declined in the last few quarters.

Govt may change new base year for GDP to 2017-18; decision likely soon

The Ministry of Statistics and Programme Implementation will decide on a new base year for the GDPseries in a few months, a senior official said on Tuesday.

The ministry is working to bring in a new series of national accounts which would result in change in the existing base year of 2011-12.

Though the ministry is considering 2017-18 as the new base year, no decision has been taken as the committees of experts are awaiting some more data before finalising their opinion.

"The decision to change the base year (of GDP) would be taken in next few months. We are waiting for Annual Survey of Industries and the Consumer Expenditure Survey. All the preparatory work is getting ready for that.

"Once the result is out, we will place it before the respective committees (to decide about the base year)," MOSPI Secretary Pravin Srivastava told reporters at a FICCI conference adding that the decision has to be taken considering global and national scenario as well.

He also said that earlier when new series with 2011-12 base year was being worked out, the ministry thought of revising it to 2009-10.

But then the economists decided that 2009-10 was not a good year globally and domestically and finalised 2011-12 as the base year for new series of GDP.

On whether the economy will see recovery he said, it is too early to comment on it because lot of inputs for tabulation depend upon the IIP (index of industrial production), CPI and WPI data, which would come in the first fortnight of November.

The economic growth slowed to over six-year low of 5 per cent in April-June this fiscal. The government has been taking steps to boost investment and perk up the sagging economy.

Regarding experts' views that industrial production for September will see a decline after core sector output contracted 5.2 per cent during the month, Srivastava said, "We do not speculate data. We wait for data to come because the data will tell us."

When asked about the need for new GDP base year, he said the change in base year actually captures the change in structures of the economy.

Icra sees FY20 steel demand growth shrinking to 5-6% from 7.9% in FY19

Domestic steel consumption growth is expected to decelerate to around 5-6 per cent this fiscal, from 7.9 per cent in FY2019, on the back of an unprecedented slowdown in economic activity, said Icra in its report today.

The country’s GDP growth tapered to 5.0 per cent in Q1 FY2020.

Consequently, margin outlook for steelmakers has weakened in Q2 due to a sharp fall in steel prices and firm raw material costs, it said.

According to Icra, the demand environment is expected to improve somewhat in the second half of FY2020, following a likely pick-up in infra spending.

“Industry operating environment remains challenging in FY2020 thus far. However, a likely pick-up in infra spending in the second half and softer coking coal prices could benefit steelmakers for the remainder of the year. Profitability may recover somewhat in Q3, with a sharp fall in coking coal prices in August 2019 and expectation of better demand from the construction sector during that quarter,” Jayanta Roy, senior vice-president and group head – corporate ratings was quoted as saying.

Given the challenging operating environment prevailing at present, ICRA estimates the industry’s operating margin to decline to around 18 percent in FY2020, compared to 23 percent in the previous fiscal.

In line with deterioration in profitability, the industry’s debt protection metrics have also weakened, said the report. The interest coverage ratio for the ICRA sample declined to around 3 times in the first quarter of FY2020, down from the intermediate peak level of 3.5 times recorded in Q2 FY2019.

With steel spreads steadily gravitating to lower levels, the industry’s total debt to OPBITDA is poised to deteriorate to around 4.5 times in FY2020 as against 3.5 times in FY2019, it said.

Bulk of the domestic steel industry’s ongoing capacity expansion projects are being undertaken by the larger integrated steel players who have the benefit of a stronger balance sheet. In FY2019, the industry operated at a capacity utilisation rate of around 84 percent. With fresh capacity addition of only around 3 million tonne per annum being planned in the current fiscal, the industry’s capacity utilisation rates are expected to remain at a healthy level of 85 percent in the current year as well, notwithstanding a slower demand growth.

“Demand worries will continue to keep steel prices under pressure, which are at present trading at a discount to imported offers. Domestic HRC prices have dropped 13 percent since March 2019, whereas domestic rebar prices have dropped 14 percent in the same period. In FY2020, domestic iron ore prices are expected to remain range-bound and there is a possibility of an ore supply deficit in the next fiscal, if mine auctions are delayed. On the other hand, blast furnace players would benefit in H2 from a steep correction in coking coal prices in recent months,” said Roy.

Globally, steel production growth remained healthy at 4.6 percent in 7months CY2019 on the back of a high output growth in China in H1 CY2019. However, due to rising trade tensions, slowing Chinese demand, and increasing concerns on the global macroeconomic health, steel production growth is expected to soften in H2 CY2019.

China’s steel exports have remained low due to its healthy domestic consumption, providing a respite to other economies including India. While the steel imports by India de-grew by 6 percent in first four months of FY2020, even steeper fall of 23 percent in steel exports and unrelenting imports from free trade agreement (FTA) countries including Japan and Korea, are likely to keep India a net importer of steel in the near term.

Nevertheless, given the fact that domestic steel prices are currently trading at a significant discount of 16 percent to landed cost of Chinese HRC and at a discount of 8 percent to landed cost of Japanese HRC, India’s steel imports would remain low at an absolute level in the coming months.

Moody's cuts India's GDP growth to 6.2% for 2019 amid economic slowdown

Amid an economic slowdown, Moody’s Investors Service has cut India’s gross domestic product (GDP) growth rate to 6.2 per cent for calendar year 2019 against its earlier projection of 6.8 per cent.

The rating agency scaled down India’s economic growth to 6.7 per cent for 2020, a cut of another 0.6 percentage points.

If it happens, Chinese economic growth rate would equal India’s this calendar year. However, India would again become the fastest growing large economy, at least in Asia, next financial year as the Chinese GDP growth rate would come down to 5.8 per cent.

India was among eight countries in Asia whose economic growth was slashed by Moody’s. On the other hand, the rating agency retained the growth rate of eight other economies.

The cut in growth rates for India was sharper for both the years than the other seven economies. While it blamed a weaker global economy and an uncertain operating environment for forecasting stunted Asian exports, it attributed slowing growth rates in India, Japan and the Philippines more to the domestic factors.

“While not heavily exposed to external pressures, India’s economy remains sluggish on account of a combination of factors, including weak hiring, financial distress among rural households, and tighter financial conditions due to stress among non-bank financial institutions,” Moody’s said.

If India does grow on the lines of Moody’s projections, it might increasing become difficult for it to become a $5-trillion economy by 2024-25, as expected by Prime Minister Narendra Modi.

For achieving this feat, the economy needs to grow by 8 per cent from the next financial year, according to the Economic Survey. This is based on the assumption that the inflation rate stands at 4 per cent a year. If the inflation rate comes down, the economic growth rate at constant prices needs to grow faster than 8 per cent a year to achieve the prime minister’s dream.

Moody’s said “cooler business sentiment and slow flow of credit to corporate contribute to weaker sentiments in India”.

It said the Reserve Bank of India (RBI) has been most active in cutting rates in support of growth, but lingering financial sector issues may blunt the effectiveness of monetary stimulus. The RBI’s Monetary Policy Committee had cut the repo rate for the fourth consecutive time in its review meeting earlier this month. In fact, the cut was sharper at 35 basis points.

Moody's cuts India's GDP growth to 6.2% for 2019 amid economic slowdown

Moody’s also said generally healthy balance sheets and fiscal positions across the region provide space to pursue countercyclical fiscal policies, but India along with Malaysia, Mongolia, and Sri Lanka did not have that leeway.

It should be noted that India’s economy grew by just 5.8 per cent in the first quarter of 2019, the slowest rate in the past 20 quarters. Economists are divided on whether the growth rate would be lower or higher in the second quarter.

However, most economists believed that the growth would be lower than 5.8 per cent in the second quarter.

The statistics office is scheduled to release the numbers later this month.

Even if the economy grows by 5.8 per cent in the second quarter, the economy still needs to grow by 6.6 per cent in the second half to yield even 6.2 per cent growth rate for 2019, not a simple feat in the current economic conditions.

D K Srivastava, chief policy advisor at EY India, said he pegged the economic growth rate at 5.8 per cent for the second quarter of the current financial year.

“The economy would witness higher growth rate in the second half and my projections are 6.3-6.4 per cent for the entire financial year.” He said the economy may grow close to 7 per cent in the next calendar year, depending on the policy measures by the government.

What's the plan for falling GDP, NPAs? Cong on govt's 'incomplete' measures

The Congress on Saturday described the government measures to boost the economy as "partial and incomplete" and asked if there was any concrete plan to address the falling GDP and rising NPAs.

Congress chief spokesperson Randeep Surjewala said the Narendra Modi dispensation has brought the economy to this "bad shape" and cannot hide it with merely a power-point presentation.

The country is reeling under recession and the government has only done a partial and incomplete rollback of provisions it imposed in its first budget, he said.

"Finance Minister, the government through 32 slides of a power-point presentation cannot hide the bad shape of economy that the BJP has brought it to.

The country is reeling under recession. The Modi government is only doing half and incomplete rollback of the provisions it imposed," he said in a tweet in Hindi.

"The GDP is falling badly, NPAs (non-performing assets) are rising rapidly day and night, but where is the concrete solution?" he asked.

The government on Friday announced a raft of measures, including rollback of enhanced super-rich tax on foreign and domestic equity investors, exemption of startups from 'angel tax', a package to address distress in the auto sector and upfront infusion of Rs 70,000 crore to public sector banks, in efforts to boost economic growth from a five-year low.

To bolster consumption, the government also said that banks have decided to cut interest rates, a move that would lead to lower EMIs for home, auto and other loans.

Labour-intensive industries can spur growth, says Rakesh Mohan

India needs to push labour-intensive large scale industries to ensure it can return to an annual GDP growth rate of 8 per cent, notes a paper authored by Rakesh Mohan (pictured) for Brookings India.

“Apart from maintenance of appropriate interest rates and a realistic and competitive real exchange rate, the achievement of such industrial growth rate needs focused attention on the promotion of labour using manufacturing exports,” according to him.

His paper is significant since it comes just before the newly-elected National Democratic Alliance (NDA) government presents its first annual Budget on July 5.

Mohan was one of the economists who presented his observations to Prime Minister Narendra Modi at an interaction last week.

The former deputy governor of the Reserve Bank of India and secretary, economic affairs, discussed the contours of his paper at a session in the city on Friday.

Mohan said other than labour-intensive manufacturing, the other points of departure in his paper was the emphasis on role of the state in promoting economic growth.

“The countries that have been successful in maintaining high rates for three decades and more have been those whose governments have succeeded in setting up growth-promoting governmental institutions that coordinate the needed public investments,” the paper said.

Commenting on the paper, Aditya Birla group chief economist Ajit Ranade said the spurt in India's growth rate between 2003 and 2008 was due to a combination of unique factors.

This included factors like global spurt in commodities due to the demand from Chinese build up for its Olympic Games, the Y2K impact and domestic reforms like the new telecom policy.

According to him, it was difficult to envisage a return of such combinations again.

Rahul's income plan for poor may cost more than Budget 2019's subsidy bill

If fully implemented, Rahul Gandhi's proposed minimum income guarantee scheme, or NYAY, would cost more than Interim Budget 2019's total subsidy expenditure of Rs 3.34 trillion. Its envisaged annual outlay, at a reported Rs 3.5 trillion, would amount to about 1.7 per cent of the Budget's estimated GDP for 2019-2020 at Rs 210.07 trillion -- or about half of the fiscal deficit for 2019-2020 at 3.4 per cent of GDP.

Congress President Gandhi on Monday said that if his party were to come to power at the Centre, it would provide a minimum income of Rs 6,000 per month to 20 per cent poorest households.

At its peak, the cost of the Congress' proposed scheme would be nearly six times the 2019-2020 Budget Estimates for the outlay on the Mahatma Gandhi National Rural Employment Guarantee Program (MGNREGA) at Rs 60,000 crore. In January 2019, the government made an additional allocation of over Rs 6,000 crore to MGNREGA, taking the total allocation to Rs 61,084 crore, which was highest ever in a financial year. Congress reportedly intends to continue MGNREGA even if the minimum income plan is implemented. 

It would also amount to over 4.5 times the cost of the Rs 75,000-crore Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) scheme. Under the latter, Rs 6,000 per year would be disbursed in three instalments to around 125 million small and marginal farmers who hold cultivable land of up to two hectares.

However, this estimated Rs 3.5-3.6-trillion expenditure needs to be qualified. In an interview with Business Standard, Congress' data analytics department head Praveen Chakravarty explained that NYAY would require Rs 3.5 trillion "at the peak". Chakravarty has also said that the expenditure would not be more than 1.2 per cent of the GDP at its peak at any point of time. Further, the Congress does not reportedly intend to implement the scheme immediately if it comes to power after the Lok Sabha polls. Before the scheme is implemented, which will take place in phases, pilot projects might be reportedly run for at least two years. 

Still, amid questions on the proposed scheme's fiscal prudence, it would be relevant to see how it would stack up, if fully implemented, against other social sector allocations.

It would amount to nearly three times the Interim Budget 2019's allocation for rural development ministry at Rs 1.19 trillion, four times the Budget allocation for the education ministry at Rs 93,847.64 crore and five times the Budget allocation for the Ministry of Health and Family Welfare and AYUSH Ministry at Rs 65,037.88 crore.

It also dwarfs the 2019-2020 Budget Estimates for fertiliser subsidy at Rs 74,986 crore, for food subsidy at Rs 1.84 trillion, and for petroleum subsidy at Rs 37,478 crore. 

Niti Aayog Vice-Chairman Rajiv Kumar said Gandhi's proposed scheme would create strong incentives against work and burst fiscal discipline. Meanwhile, Finance Minister Arun Jaitley accused the Congress of "bluffing" the people.