Slowdown Blues: CMIE paints not-so-happy picture for economy; urban consumption, credit growth to remain bleak

The Indian economy is slowing down, according to the Centre for Monitoring Indian Economy (CMIE). In FY20, the CMIE expects Indian economy to grow at 7 per cent amid increase in headline inflation and reduced availability of bank credit. Private consumption in rural India could get a boost from better agricultural prospects, but the consumption in urban India is likely to remain weak due to sluggishness in employment generation, according to the think-tank. The country's gross domestic product (GDP) growth that ranged between 8 and 8.2 per cent in 2015-16 and 2016-17, slid to 7.2 per cent in 2017-18 and dropped further to seven per cent in 2018-19.

Investment demand too is expected to be subdued as Indian corporates lack interest in adding new capacities. And, the focus of the new government, no matter whether NDA, UPA or a third front comes into power, will be on providing direct income support to the weaker sections, than giving a big push to the economy through large capital spend.

Inflation

CMIE expects inflation to increase to 4 per cent in 2019-20, backed by higher food prices. Food inflation at the wholesale level rose rapidly from -0.4 per cent in December 2018 to 5.7 per cent by March 2019. The sharp increase in prices is yet to trickle down at the retail level, it added. Also, PM-KISAN or NYAY, if implemented in time, is likely to add to food inflation through increased demand in the second half. Core inflation is expected to soften by around 50 basis points to five per cent, as effect of the 7th Pay Commission hike on housing inflation fades away completely, CMIE said.

Bank credit growth

CMIE believes that SCBs (scheduled commercial banks) will not be able to maintain high pace of growth. Growth will ease to 10.8 per cent by March 2020. Credit disbursal to NBFCs is expected to slow down as most of them will not be eligible for bank credit as per the new norms issued by the Reserve Bank of India. The RBI has directed PSBs to grant loans to only those who enjoy high credit rating i.e. A+ and above. 50 per cent of the NBFCs rated last year had a rating lower than A+. Demand for credit from corporates is likely to be subdued as they go slow on capacity expansion. Besides, the Securities & Exchange Board of India (SEBI) has directed corporates to meet 25 per cent of their funding requirement through short-term market instruments from April 2019, which will restrict the demand for bank credit.

Fiscal math

CMIE believes maintaining fiscal discipline is going to be a difficult task for the next government as it will inherit huge subsidy arrears (food, oil and fertiliser) of nearly Rs 2.5 lakh crore. In addition, both NDA and UPA have promised large expenditure on income support schemes. On the other hand, the revenue side seems to be weakening too with the government unable to meet its targets.

Moreover, the government once again resorted to off-budget financing, providing a loan of Rs 60,000 crore from the National Small Savings Fund (NSSF) to the Food Corporation of India (FCI) due to its inability to finance the latter's food subsidy dues. Though this loan will not reflect in the government's balance sheet, its repayment is the centre's obligation.

Current account deficit

CMIE expects CAD to improve in 2019-20. Weak domestic demand for non-POL imports, particularly gold, and falling import prices of coal are expected to keep the CAD low at 1.7 per cent of GDP. This, coupled with a modest increase in FDI due to Essar Steel buyout by Arcelor Mittal and return of FPI inflows, although low in magnitude, is likely to lead to an accretion to forex reserves of over USD 10 billion.

CMIE further commented that India's current account deficit (CAD) widened to USD 51.8 billion in the first nine months of 2018-19 itself, as compared to the full year print of USD 48.7 billion in 2017-18. The CAD amounted to 2.6 per cent of GDP. Trade deficit expanded to USD 85.01 billion during April-December 2018 due to a sharp 32.6 per cent rise in prices of Indian basket of crude oil. Indian economy could not finance the widening CAD. A flight of FPIs (USD -11.9 billion) and stagnation in FDI inflows (USD 24.8 billion) lead to a draw-down of forex reserves of USD 17.5 billion during April-December 2019.