Taking a cue from the evolving macroeconomic headwinds, the Reserve Bank of India (RBI) had opted to cut repo rate by another 25 basis points to provide the much-needed impetus to growth. It also continues its ‘neutral’ stance with prospects for further rate cuts to pump prime the economy. The RBI’s move is in line with market expectations to bring down input costs for industry by lowering rates. Based upon the downward advance estimates of the gross domestic product (GDP) for FY19 from 7.2% to 7% by the Central Statistics Office (CSO), the RBI was pragmatic and revised its GDP outlook from of 7.4% to 7.2% for FY20. It is expected to remain in the range of 6.8-7.1% in HI of 2019-20 and 7.3-7.4% H2.
The CSO accordingly placed the gross value added (GVA) at 6.8% for FY19, a tad down from 6.9% in FY18 sending impulse of marginal slowdown. It also fell to 6.3% in Q3 of FY19 due to deceleration in agriculture output. Foodgrain production at 281.4 million tonnes in FY19 was 1.2% lower than the previous estimates.
With looming El Nino impact, the monsoon may play truant during the year adding to the challenges. The industrial GVA was placid but manufacturing had shown signs of abatement. The index of industrial production (IIP) too slowed to 1.3% in January and the eight core industries were sluggish in February. But there are many other emerging signs of growth potentiality that need support to speed up growth. Hence, the monetary policy for FY20 has taken steps to invigorate growth momentum so that stakeholders could harness early signs of growth.
Strengths of the Economy
The business index of industrial outlook survey (IOS) points towards an improvement in the overall sentiment reflected in Q4 of FY19. The purchasing managers index (PMI) continued to be in expansion mode for the 20th consecutive month in March 2019. Despite early signs of moderation in the service sector growth, it is expected to pick up pace once the socio-political uncertainty ends in Q1 of FY20. Capacity utilisation (CU) in the manufacturing sector measured by RBI’s survey – Order books, Inventory and Capacity Utilisation Survey (OBICUS) — indicates a spurt in the long-term average to 76.1% from 75.4%, reflecting better business sentiments.
Given adequate support, it can fuel pace provided the flow of credit to the commercial sector could be accelerated in the near term.
The supporting features include moderate retail inflation measured by the consumer price index (CPI). It was a tad up at 2.6% in February after softening continuously for four months. The RBI has now estimated it downwards to 2.4% in Q4 of 2018-19, 2.9-3% in HI of 2019-20 and 3.5-3.8% during H2 with upside risks if monsoon goes adverse, and fuel and food prices move north.
Thus on the positive side, higher financial flows to the commercial sector augurs well for economic activities. Private consumption, which has remained resilient, is also expected to get a fillip from public spending in rural areas and an increase in disposable income from the PM–Kisan scheme and tax benefits built in the interim Budget. However, how the final Budget pans out post general elections will determine the way forward.
This sector is turning positive with rupee gaining some strength with the strategic intervention of the RBI through $-rupee swap of $5 billion in the first leg to provide liquidity to banks. Despite some slowdown in exports, the oil import bill has been downsized due to softer international crude oil prices. Trade deficit narrowed in February 2019 -– lowest in 17 months. However, the ongoing global trade tiff, including the potential end of Generalised System of Preferences (GSP) by the US, may have an adverse impact. The withdrawal of GSP may impact exports to the US to the tune of $5.6 billion in the current fiscal.
The silver lining is the spurt in net foreign direct inflows (FDI) during April –January 2019 taking the forex reserves to $412.9 billion by end of March 2019. The external sector risks continue to loom large but strong forex reserves, sustained investment grade ‘BBB-‘ by Fitch International Rating Agency and status quo in interest rates by the US Federal Reserve is expected to keep external sector in good stead with its positive spillover impact on the domestic economy.
The banking system, facing multiple challenges, saw some early signs of improvement in Q3 of FY19. The recent quashing of RBI’s directive to banks to invoke the Insolvency and bankruptcy Code (IBC)– 2016 by the apex court has created a new wave of uncertainty in the asset quality management.
While the RBI in collaboration with the government will wriggle out of its ramification, the resolution applications of banks pending with the NCLTs are in a state of delirium. Similarly, the Infrastructure Leasing and Financial Services (IL&FS) fiasco has deepened further and when seen together with Videocon loans on the brink of turning toxic, the bad loan burden of banks is set to increase by another Rs 1.8 lakh crore, causing a big blow to the already convulsing sector.
But the positive point is the recent trends of revival in credit growth to 14.5% year-on-year as on March 15, 2019, from 10% recorded during the previous year. However, deposit are behind with 10% growth as against 5.9% of the previous year. With deposit growth trailing, banks are saddled with liquidity crunch. But the RBI is aggressive in providing liquidity support while the government is infusing capital to ensure that the flow of credit is not interrupted. Moreover, the Marginal Cost of Funds based lending Rates (MCLR) system is expected to continue with the RBI promising to go for further consultation before the new benchmark lending rate system is unveiled.
In such mixed business sentiments, the candid growth centricity of the RBI needs to be tapped by banks by stepping up credit flow despite the turbulence caused by a new spate of challenges if the latent growth potentiality is to be fully harnessed. Unless the growth momentum is sustained, employment-intensive sectors cannot thrive to bring about the synergy of RBI policy move to catapult Indian economy to be the third largest in a decade from now.
(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)