INDIAN ECONOMIC SAGA OF DESPAIR AND HOPE

WHAT CAUGHT THE ATTENTION OF THE ELITE AND THE COMMONER ALIKE IN INDIA WAS THE IMF’S LATEST ECONOMIC OUTLOOK THAT ANNOUNCED BANGLADESH OVERTAKES INDIA IN GDP PER CAPITA. HOW DID THIS HAPPEN? WAS THE QUESTION EVERYONE ASKED INCLUDING US, SO LET’S ANALYSE WHERE INDIAN ECONOMY WENT WRONG AND HOW THE FUTURE LOOKS LIKE. By: Sapna Srivastava The advent of festival season has raised hopes of Indian industries and businesses, eagerly awaiting consumer spending and recovery of the economic activities. However, urban discretionary spending continues to be restrained in the wake of financial insecurity. “The government began easing a stringent lockdown in June, but business still is only a quarter to a fifth of usual and customers are scarce,” said Praveen Khandelwal, General Secretary, Confederation of All India Traders “Consumers spending in the festive season is likely to dip by 33% this year,” according to a survey by Local circles, which also found out that e-commerce is expected to see a major spike as the percentage of consumers that will use e-commerce as a primary channel for shopping is expected to rise from 27 per cent last year to 51 per cent this year. Economist Arun Kumar, an expert on India’s informal economy explained that consumer confidence is likely to remain low due to lingering uncertainty as the festive season approaches. “Unless the demand is put into the economy, growth is not going to really pick up even if you allow industries to reopen,” he said. On the brighter side, home buying displayed better than expected recovery in Q3 as per Knight Frank India. Home sales volume has jumped by 2.5 times to 33,403 units in Q3 2020 compared to 9,632 units in Q2 2020, while new residential unit launches increased by 4.5 times to 31,106 units in Q3 2020, compared to 5,584 units in the previous quarter. The contradictory consumer behaviour is not hard to understand. In these complex times of health and financial crisis, the vulnerability to job losses and pay cuts has forced lower spending at retail for some time, but the concern for financial security has induced people to buy their own homes. INDIA'S CONTRACTING ECONOMY In March Prime Minister Narendra Modi announced a 1.7 trillion rupees ($22 billion) economic stimulus package followed by $1.46 trillion stimulus for infrastructure projects to boost the sagging economy. Other subsidies included a cash grant of 6,000 rupees ($80) a year each for 86 million poor farmers and free cooking gas cylinders for 83 million poor women until the end of September. The mega Rs 20 lakh crore stimulus package announced by PM Modi in May included previously announced measures to save the lockdown-battered economy, and focused on tax breaks for small businesses as well as incentives for domestic manufacturing. The combined package works out to roughly 10 per cent of the GDP, making it among the most substantial in the world after the financial packages announced by the United States, which is 13 per cent of its GDP, and by Japan, which is over 21 per cent of its GDP. Nobel Laureate Economist, Prof Abhijit Banerjee is of the view that the government stimulus has not been adequate to meet the needs. “First priority is to increase consumer spending, especially by the low income population. The government needs to do more, such as direct cash transfers for the poor and others severely affected by the prolonged lockdown.” In a report, Kotak Institutional Equities assessed sectors that employ the largest share of urban workers and where they stand on the vulnerability scale. The research showed that sectors seen to be severely impacted by Covid-19 crisis offer nearly 45% of urban jobs. This includes construction, hospitality, retailing and travel and transportation, to which the government has not provided any special support. THE GREEN SHOOTS OF RECOVERY One of the developments that gives hope to manufacturing sector is the rural bounce back fuelled by government stimulus and reduced impact of lockdowns. Consumer goods companies to accelerate spends on hinterlands, with rural spending on distribution outreach, consumer promotions and products overtaking that of urban spends this year. Simultaneously, E-commerce witnessed 17% growth post Covid-19. The number of consumers shopping directly from the brand’s website is increasing at much faster pace than marketplaces. Brand websites have witnessed 88% order volume growth and 32% order volume growth on online marketplaces. This in turn is driving India’s warehousing and logistics sector, contributing up to 40% of total warehousing demand this year. Overall leasing or absorption in the top eight cities stood at 11 million sqft in the first half of the calendar year against a 12-quarter average or 7.3 million sqft. What’s more, Indian government has already made a move on companies leaving China by planning to develop land pool nearly double the size of Luxembourg to lure businesses moving out of China. A total area of 461,589 hectares has been identified across the country for the purpose that includes 115,131 hectares of existing industrial land in states such as Gujarat, Maharashtra, Tamil Nadu and Andhra Pradesh. However many experts are sceptical on the ‘Atmanirbhar Bharat’ narrative of the government. Analysts expressed that for India, rather than being obsessed with being autonomous, it needs to be competitive in the global market by specializing in what its good at. INFRASTRUCTURE & REAL ESTATE The structural reforms, liquidity schemes and fiscal support provided by RBI and the government are expected to provide some relief to stressed asset classes of Indian real estate. The notable reduction in home loan rates and incentives to banks to infuse credit into the economy are encouraging those sitting on fence to make a home purchase. The credit-linked subsidy scheme (CLSS) for the housing sector has received an extension up to March 2021 is an additional incentive for the homebuyers. Combined with developer’s festive offers, the residential real estate seems to be on the road to recovery. RBI has also allowed NBFCs to extend the date for commencement of commercial operations (DCCO) for loans given to commercial real estate by an additional year, providing relief to commercial real estate developers' cash flows. What’s more, the recent performance of REITs in India have shown a ray of hope for attracting more investment towards the commercial real estate sector. By extending support to agriculture infrastructure, government plans to manage the storage centres, developing and creating modern warehouses and cold storage facilities for agri-based small businesses. This offers another opportunity for private developers to foray in warehousing and industrial parks real estate. The government has also allocated INR 81 billion (USD 1.1 billion) towards social infrastructure, providing viability gap funding up to 30% of the total project cost. According to Colliers, this move is expected to play a key role in creating new clusters for real estate development. The developers should explore this scheme to plan social infrastructure projects in the micro markets where their projects/land banks are situated. The challenge for realty sector remains in terms of liquidity crunch as the government announced funds, still lay unused. Banks have to put the real estate sector on the priority lending list so that the infrastructure development should not come to a halt. Most urgent for government now is to boost infrastructure works across the country to support a chain of industries dependant on these sectors. Not only national highways but also the Pradhan Mantri Sadak Yojana (PMGSY), and the Centre and State finance commission funds for local bodies, both urban and rural, converged with MGNREGA, will trigger economic growth once the available funds are released with immediate effect by the states. In spite of all these measure, where the Modi government is going wrong is by not providing credit itself, but instead becoming a credit-guarantor, expecting banks and private sector to invest. With banks reluctant to lend to corporates and non-banking financial companies and private sector being cash strapped, the government finds it has precious little to guarantee. INDIA’S GDP TRUTH AND MISLEADING COMPARISONS Some of the most talked about Indian economy’s comparisons have been made with world super power USA on one hand and that of our neighbouring country Bangladesh on the other. An interesting comparison proclaiming that Indian economy is better than that of US with GDP contraction of 32 per cent as against India’s 23.9 per cent in the June quarter. As economists explain, this is misrepresenting global GDP statistics. Madan Sabnavis, Chief Economist, CARE Ratings gives the true picture. "Different countries use different approaches when calculating GDP. We do year-on-year (YoY), while several others do quarter-on-quarter (QoQ). Hence, while we compare Q1FY20 with Q1FY19, other countries may compare Q2 (i.e. April-June) with Q1 (Jan-March) after removing the seasonality factor. That’s where the difference lies in how India and the US report GDP growth. US does a QoQ comparison, and then annualises the figure. So they assumed that this quarter's fall would continue at the same rate for the next three quarters, i.e. 32 per cent on an annualised basis. India compares what happened this quarter to the same quarter in the previous year. So with that regard it should be US 9 per cent and India 24 per cent. Now, coming to the comparison with Bangladesh. In the IMF’s estimation, in 2020, the per capita income of an average Bangladeshi citizen is be more than the per capita income of an average Indian citizen. India's per capita GDP in 2020 will see a decline of 10.3 per cent as against a rise of 4 per cent for Bangladesh. The comparison seems surreal given India’s economy is over 10 times the size of Bangladesh and has grown faster every year. The secret lies in an important variable while calculating GDP per capita - the overall population. The per capita income is arrived at by dividing the total GDP by the total population. There are two main reasons why India’s per capita income has fallen below Bangladesh this year. Since 2017 India’s growth rate has decelerated sharply, while Bangladesh’s has become even faster. Over the same 15-year period, India’s population grew faster (around 21%) than Bangladesh’s population (just under 18%). Moreover, Bangladesh’s GDP is led by the industrial sector, followed by the services sector. Both these sectors create a lot of jobs and are more remunerative than agriculture, which happens to be the major sector of employment in India. Beyond the economics, in last two decades Bangladesh has improved on several social and political metrics thereby boosting its economy. Having said that, the GDP figures and overall economic scenario is less shocking than they appear. The IMF compares both countries’ economies in U.S. dollar terms, using average exchange rates as a guide. In that sense, unlike the Indian rupee, the Bangladeshi taka does not trade freely and is widely believed to be overvalued. Secondly, international estimates of Bangladesh’s population differ by several million and of India’s by more than 50 million. Thirdly, evaluating on purchasing power parities (PPPs), which adjusts for the cost of living in a country. India’s GDP per capita of $6,284 is still well above Bangladesh’s $5,139. Last but not the least, even in nominal terms, Bangladesh didn’t actually overtake India; India dipped below Bangladesh due to the economic impact of the coronavirus. The IMF report, however, foresees a sharp recovery for India in 2021, which will get India ahead of Bangladesh once again in per capita GDP. LOOKING FORWARD TO A BRIGHT FUTURE At a time when RBI has forecast the economy will contract by 9.5 per cent in 2020-21 and the IMF has projected a decline of 10.3 per cent, the ground realities of rebound seen in last few months give a hope of life coming back to normalcy sooner than later. The biggest positive indicator has been the real estate recovery that has been much quicker than expected. Given that more than 250 allied industries depend on real estate sector, the domino effect of realty revival will boost growth in other sectors as well. A lot of global investors too believe in the Indian story as has been seen in increase in FDIs and REIT investments in India. Banks and NBFCs too are focussed on repairing the balance sheets and raising capital ratios. Growth is already creeping back, the question is of sustaining and strengthening it. WHAT THE GLOBAL ANALYSTS HAVE TO SAY GOLDMAN SACHS: INDIAN ECONOMY REBOUND BY 2021 Global rating agency Goldman Sachs has cut its estimates for growth in India's gross domestic product (GDP) for the current fiscal 2020-21 (FY21), but it expects the economy of the country to see a full-bound recovery by 2021. The research firm expects real GDP growth to contract 14.8 per cent in FY21 against its earlier estimate of 11.8 per cent contraction in this period. The agency, however, expects real GDP to bounce back strongly to 27.1 per cent on year-on-year basis in Q2 2021 (April June 2021) due to favorable base effects. This is based on assumption that 70 per cent of the lost output in June 2020 will recover by June end of 2021. India's gross domestic product (GDP) contracted by a sharp 23.9 per cent in April-June period of the current fiscal. Some agencies have predicted negative growth even during the July-September quarter of the current fiscal (April 2020 to March 2021). Goldman Sachs has pegged average annual GDP growth in calendar year 2021 (CY21) and fiscal year 20212-22 (FY22) at 9.9 per cent and 15.7 per cent, respectively, against previous estimate of 3.8 per cent and 7 per cent. "Our forecasts assume that in level terms, real output in March 2022 would still be around 2 per cent below its level in March 2020," it said. IMF: INDIAN ECONOMY 8.8% GROWTH IN 2021 The IMF, in its latest 'World Economic Outlook' report, said that the Indian economy hit by coronavirus pandemic - is projected to contract by a massive 10.3 per cent this year, but it is likely to bounce back with an impressive 8.8 per cent growth rate in 2021. The revisions to the forecast are particularly large for India, where Gross Domestic Product (GDP) contracted much more severely than expected in the second quarter. As a result, the economy was projected to contract by 10.3 per cent in 2020, before rebounding by 8.8 per cent in 2021. In 2019, India’s growth rate was 4.2 per cent. If the Indian economy achieves the projected growth rate, it will regain the position of the fastest-growing emerging economy, surpassing China's projected growth rate of 8.2 per cent. According to the IMF, India is among those likely to suffer the greatest damage from global warming, reflecting its initially high temperatures. For India, the net gains from climate change mitigation-relative to inaction-would be up to 60-80 per cent of GDP by 2100. FITCH: INDIAN ECONOMY REBOUND OF 9.9 PER CENT IN FY22 Japanese research firm Nomura, Fitch Ratings and India Ratings also see hopes of recovery in FY22. India Ratings and Research, which pegged GDP to contract 11.8 per cent in FY21, has estimated a rebound of 9.9 per cent in FY22. Fitch Ratings expects India's economy to contract 10.5 per cent in the current fiscal before bouncing back in the next financial year. The economy, it said, will recover to 11 per cent in 2021-22 largely owing to base effect and grow by 6 per cent in the following year. WORLD BANK: INDIA'S GROWTH REBOUND 5.4% IN FY22 The World Bank projected India’s gross domestic product (GDP) to plunge in FY21 by 9.6% revised down since its June forecast of 3.2% drop, reflecting the impact of the nationwide lockdown and the income shock experienced by households and small urban service firms. Growth is expected to rebound to 5.4% in FY22, which assumes covid-related restrictions are completely lifted, but mostly reflecting base effects. The Indian economy contracted a record 23.9% in the June quarter, underlining the extent of economic damage brought about by the pandemic and the ensuing lockdown. Many forecasters now expect Indian economy to contract in double digits in FY21. The potential output is expected to remain depressed in the medium term and inflation is expected remain around the RBI’s target range mid-point of 4% in the near term. The covid-19 shock will lead to a longlasting inflexion in India’s fiscal trajectory. Assuming that the combined deficit of the states is contained within 4.5-5% of GDP, the general government fiscal deficit is projected to rise to above 12% in FY21 before improving gradually. Public debt is expected to remain elevated, around 94% (in FY23), due to the gradual pace of recovery.