Quarterly Review of the Economy, 2020:1Q in Coronavirus times May - - PowerPoint PPT Presentation

Quarterly Review of the Economy, 2020:1Q

in Coronavirus times

May 15, 2020 New Delhi

QRE Team

Team Members Sudipto Mundle, Bornali Bhandari, NR Bhanumurthy (NIPFP), Anil K Sharma, Pallavi Choudhuri, Rudrani Bhattacharya (NIPFP), Saurabh Bandyopadhyay, Prerna Prabhakar, Sanjib Pohit, Poonam Munjal, Devender Pratap and Ajaya K Sahu Special Acknowledgements Usha Thorat, GC Manna and Anushree Sinha Organisational Support Sudesh Bala, Praveen Sachdeva, Anupma Mehta, Shilpi Tripathi, Sukriti Chauhan, Khushvinder Kaur and Sangita Chaudhary

Outline

I. Performance of the Real Economy and Trade A. Real Sector Trends B. Demand-side Trends C. Business Sentiments

• D. Price Trends
• II. Policy Simulations

III.Macroeconomic Policies A. Fiscal Policy B. Monetary Policy and Credit

Sustained declined in GDP Growth since 2016-17 before coronavirus crisis

8.3 4.5 8.7 3.0 2 4 6 8 10 % change

Real GDP Growth

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates.

Sharp decline in agricultural growth since Q4: 2017-18

6.8 2.42.3 6.5

• 1

1 2 3 4 5 6 7 8 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 Q1: 2020-21 % change GVA Growth Agriculture

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates

Steep Decline in Industrial Growth since Q1: 2018-19

Expected decline of (-)27% in 2020-21 and (-)54% in Q1: 2020-21

9.6 1.4 8.1 0.7 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 % change Growth in Industry GVA

Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates

IIP confirms continuing industrial slowdown

Growth (%) in IIP General

4.4

• 0.7

6.5

• 3.8
• 6
• 4
• 2

2 4 6 8 2017-18 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 % change

Growth (%) in IIP Manufacturing

4.6

• 1.3

7.5

• 5.8
• 8
• 6
• 4
• 2

2 4 6 8 10 2017-18 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 % change Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates

Sharp decline in services growth projected for 2020-21

9.4 6.7

• 8.1

8.4 5.3

• 16.3
• 20.0
• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 15.0 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 Q1: 2020-21 % change Growth in GVA Services

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates

Cargo and passenger traffic continue to decline

Revenue Earning Goods Traffic and Cargo Handled at Major Ports

• 2.3
• 31.7
• 35
• 30
• 25
• 20
• 15
• 10
• 5

5 10 15

Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20

% change

Revenue Earning Goods Traffic (%yoy) Cargo Handled at Major Ports (%yoy)

Air Passenger and Cargo Traffic

• 2.6
• 1.2
• 10.0
• 5.0

0.0 5.0 10.0 15.0 20.0 25.0 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 % change Total Air Passenger Traffic (%yoy) Total Air Cargo Traffic (%yoy) Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual and _ Quarterly Note: The data for Air traffic are from January-February 2020. Source: CMIE and Airports Authority of India.

Consumption demand declining sharply

8.1

• 9.1

16.2

• 1.9
• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 15.0 20.0 % change

Growth in IIP Consumer Durable and Non-durable Goods

IIP Consumer Durable Goods IIP Consumer Non-durable Goods

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO . Source: MoSPI

Investment demand falling sharply

6.5 9.8 12.9

• 5.2
• 8
• 6
• 4
• 2

2 4 6 8 10 12 14 % change Growth in Real Government Fixed Capital Formation

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual and _ Quarterly Source: MoSPI

Government Expenditure compression reversed after Q1: 2019-20

6.5 9.8 8.8 11.8 2 4 6 8 10 12 14 2015- 16 2016- 17 2017- 18 2018- 19 Q4: 2018- 19 Q1: 2019- 20 Q2: 2019- 20 Q3: 2019- 20 % change Real Government Final Consumption Expenditure

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Legend: _ Annual and _ Quarterly. Source: MoSPI.

Exports and imports growth declining since Q2: 2018-19, now negative

32.9

• 4.1
• 15
• 10
• 5

5 10 15 20 25 30 35 2017-18 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20

Growth of Imports of Goods and Services (Rs terms, %yoy)

Legend: _ Annual and _ Quarterly Source: Ministry of Commerce and RBI. 26.1

• 3.9
• 10
• 5

5 10 15 20 25 30

2017-18 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20

Growth of Exports of Goods and Services (Rs terms, %yoy)

Business and Political Confidence Indices (NCAER) continue declining in April 2020

14

Source: NCAER

77.4 73.7

60 80 100 120 140 160 180 Index

Business Confidence Index (BCI) and Political Confidence Index (PCI)

BCI PCI

Nikkei PMI dropped sharply in April 2020

51.8 27.4 49.3 5.4

10 20 30 40 50 60 70 PMI Indices April 2018 to April 2020 PMI Manufacturing PMI Services

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Source: Nikkei PMI

Inflation trends

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 % change CPI and WPI

CPI WPI Inflation Rate (%yoy)

Source: MoSPI and Office of Economic Advisor

Baseline Assumptions about Disruptions in Key Sectors

Sector 2019- 20:Q4 2020- 21:Q1 2020- 21:Q2 2020- 21:Q3 2020- 21:Q4 2019- 20 2020-21 Agriculture 0.0 3.0 3.0 3.0 2.4 2.3 Industry 0.7

• 54.2
• 27.0
• 27.0

1.4

• 27.1

Services 5.3

• 16.3
• 8.0
• 8.0

5.8

• 8.1

GVA 3.0

• 25.7
• 12.3
• 12.3

0.5 4.4

• 12.5
• Negative growth to continue until Q3: 2020-21 and recover modestly to 0.5%

in Q4

• For the whole year, GDP growth expected to be (-)12.5%
• These are based on assumption of no policy stimulus (either monetary or

fiscal)

• What could be the impact of various stimulus measures undertaken till now?
• Alternative fiscal policy simulations and their impact are assessed using policy

simulations model

About the policy simulation model

• Core model has 31 equations

– 21 behavioral equations and 10 identities

• Simple model, cause effect relationships are transparent
• It is a demand side model with four major blocks: Income, fiscal,

monetary and external

• Follows eclectic approach
• Flexible, easily adaptable to address different questions
• Present version is used for working out macro-fiscal relationships for the

15th FC

• A negative growth of -12.5% for 2020-21 is imposed on the model to

derive deficit conditions for the base case

• In addition, four possible policy scenarios are simulated to derive GDP

growth, FD, Inflation and CAD

Policy Simulations: Four Scenarios

Scenario 1

• Starting with

the base case, revenue and capital expenditures are increased as per the 2020-21 (Budget Estimates). Scenario 2

• Increase

public expenditure by 1% of GDP

• Reduce Repo

Rate Scenario 3

• Increase

public expenditure by 3% of GDP Scenario 4

• Increase

public expenditure by 5% of GDP

Scenarios GDP growth (%) Inflation (%) Fiscal Deficit (as % of GDP) CAD (as % of GDP) Base case

• 12.5

4.5 6.4 1.4 Scenario-1

• 4.1

6.6 7.4 2.3 Scenario-2

• 1.9

7.4 7.7 2.5 Scenario-3 1.2 8.9 8.8 3.0 Scenario-4 3.6 10.1 9.4 3.6

Policy Simulation Results

Key Takeaways: Facing Stark Choices

• Fiscal stimulus of 3% (Scenario 3) is enough to generate positive GDP

growth

• 5% fiscal stimulus (Scenario 4) generates 3.6% growth

This is closest to Government stimulus package. However, there are trade-offs: this results in double-digit inflation with unsustainable CAD of 3.6%.

• The model suggests aggregate demand responds faster to stimulus than

aggregate supply, hence, the rise in inflation

• Any improvement in supply side could moderate inflationary pressures,

but this needs broader policy interventions.

Fiscal Outlook

• Great deal of uncertainty about economic activity, revenue, expenditure,

deficits etc. in 2020-21

• Budgets of Central and State governments now mostly of academic

interest, will need revision through supplementary budgets

• Assessments of fiscal outlook have to be largely based on judgments and

assumptions

• Our assessment of fiscal outlook draws on the model based simulations

presented earlier

Fiscal Outlook

Scenario 1

• Assumes expenditure

levels as in Central and State budgets

• GDP still declines by

4%

• With extra borrowing

to compensate for the consequent revenue shortfall Fiscal Deficit rises to 6.6% Scenario 4

• Assumes a high

expenditure stimulus

• f 5% of GDP over and

above the budgeted levels for 2020-21

• Generate 3.6% GDP

growth

• However, this comes

along with a large Fiscal deficit (9.4%), double digit inflation (10.1%) and an unsustainable Current Account Deficit (3.6%

• f GDP)

Scenario 3

• Assumes a smaller

expenditure stimulus

• f 3% of GDP

additional spending

• ver budgeted levels

for 2020-21

• Positive GDP growth
• f 1.2%
• A lower inflation

(8.9%), a smaller Fiscal deficit (8.8% of GDP) and smaller current account deficit (3% of GDP) as compared to Scenario 4

• Preferred Scenario

Fiscal Outlook

• On 12 May the Prime Minister announced a massive stimulus package of

Rs 20 trillion (10%of GDP)

• This includes both monetary and fiscal stimulus measures

RBI liquidity infusion of Rs 8 trillion( 4% of GDP)

• Netting out the liquidity component, the remaining headroom for

additional borrowing to finance Covid19 related expenditure out of the Rs 20 trillion envelope is Rs 12 trillion (6% of GDP) This includes the additional borrowing of Rs 5.9 trillion (3 % of GDP) already announced before 12 May

Fiscal Outlook

• This huge expenditure stimulus even exceeds the expenditure stimulus of

5% of GDP in our Scenario-4

• This would lead to even higher growth but also higher inflation and a

larger Fiscal Deficit and Current Account Deficit than in Scenario-4, where these were already too high

• It is therefore suggested that this stimulus package be spread over two

years: 2020-21 and 2021-22.

• Options for financing this massive additional borrowing on top of the

earlier budgeted borrowing are discussed in the next section on monetary policy.

Weak Transmission

Source: RBI

8.5

8.5

6.0 6.3 6.5 6.5 6.5 6.3 6.0 5.8 5.4 5.2 5.2 5.2 9.4 9.5 9.6 9.8 9.8 9.8 9.8 9.7 9.7 9.6 9.5 9.3 9.4 9.3 6.5 6.6 6.8 6.8 6.9 6.9 6.9 6.8 6.7 6.5 6.3 6.3 6.2

3 4 5 6 7 8 9 10 Repo Rate, WALR and Term Deposit Rate April 2018 to February 2020

Repo Rate (%) Bank Group-wise Weighted Average Lending Rates (WALR) on fresh rupee loans sanctioned(%) Term Deposit Rate (>1 year, %)

Transmission still weak for 10 year G- secs but strong for shorter maturity

• govt. bonds

3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8

Repo Rate and yield on Domestic bonds of various maturities (%), (April 2019 to April 2020)

Policy Repo Rate Reverse Repo Rate 91-Day Treasury Bill (Primary) Yield 364-Day Treasury Bill (Primary) Yield 10-Year G-Sec Par Yield (FBIL)

Source: RBI

Non-food credit growth very weak

6.3 7.1 12.5 10.0 12.5 12.2 13.7 13.0 12.0 8.7 6.4 6.1 5.0 10.0 15.0 Non-food Credit (%yoy)

Non-food Credit

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: CSO Source: RBI.

Source: RBI

8.5

8.5

Credit growth depressed for all segments except personal loans

6.07 2.78

• 0.09
• 0.23

3.40 11.01 13.35 5.08 5.79 0.67

• 0.36

3.92 0.69 6.93 17.05 0.28

• 2.00

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

Growth Rate of Bank Credit by Sectors (%, y-o-y)

15-02-19 28-02-20

Rising Risk Aversion and Stalled Bank lending

• Rising risk aversion against lending to NBFCs even prior to Covid19 crisis

due to several scams like IL&FS but NBFCs main source of credit for MSMEs  TLTRO 2 of ₹25,000 crores, intended for directing credit to NBFCs remained only half subscribed.

• Similar rising risk aversion to lend to MSMEs.
• Such risk aversion likely to increase under Covid19 crisis

MSME borrowers also averse to borrowing under present conditions Cedit flow to MSMEs has virtually dried up Need credit guarantees or partial credit risk guarantees

• Measures just announced on 13 May do include these provisions

Government credit guarantee for MSMEs RBI Partial credit guarantee

Challenge of Massive Government Borrowing post Rs 20 trillion stimulus package

• Including ₹12 trillion additional borrowing to finance fiscal component of

₹20 trillion stimulus package, total government borrowing program of

• ver ₹17 trillion ( 8.5-9.5 of GDP)
• Government borrowing on such a scale unprecedented in India, not clear

if financial system can cope

• Multiple channels need to be used to face this massive demand for

sovereign loans

Challenge of Massive Government Borrowing post Rs 20 trillion stimulus package

• Possible channels for financing government borrowing

Commercial bank lending, beyond a point will raise yields and crowd

• ut private borrowers

Re-purposing and further liberalisation of ‘Ways and Means' advances, allowing much larger advances for up to 1 year, then converting advances to dated securities Direct monetisation of residual deficit by RBI, lender of last resort, through private placements

• Finally, it would be more prudent to spread this borrowing over two years,

2020-21 & 2021-22 This would help to revive the economy while maintaining financial stability.