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Banking News: September 3, 2018
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GDP Growth at 8.2%, But It
May Not be Sustained, Says SBI
The Moneylife News
Published
on September 2, 2018
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Mumbai, September
1: An upswing in manufacturing activity and revival of private
investment, supported by strong consumer demand, accelerated India's gross
domestic product (GDP) growth rate during the first quarter of FY2018-19 to
8.2%, official data showed.
While growth in gross
value added (GVA) is a welcome sign, there are certain factors like
languishing agricultural prices, and continued depreciation in rupee, which
could lead to a sub-7.5% growth for FY2019, says a research report.
In the report, State
Bank of India (SBI), says, "Reserve Bank of India (RBI)’s successive
rate hikes will have a heavy toll on private consumption expenditure. During
FY2014, three successive rate hikes led to collapse of private consumption
expenditure to 2% during third quarter of FY2015.
Thus, continued rupee
depreciation and given the significant costs of RBI intervention in forex
market, could result in at least one more hike, possibly frontloaded. This
will lead to sub-7.5% growth for FY19 despite more than 8% growth in Q1. This
is going to be most important predicament going forward!"
The GDP growth during
first quarter of FY2019 came in at 8.2% compared with 5.6% growth during same
quarter last year. Around 40 basis points (bps) of the upside from consensus
growth projection of 7.7% is attributed to elevated agriculture sector
growth.
"Though the
agriculture and allied sector GVA increased to five-quarter high to 5.3%,
this is mostly driven by livestock products, forestry and fisheries
component, expanding at 8.1%. Stripping aside this, the agri growth
mean reverts to around 2.5%. But the worrying sign continues to be
agriculture prices which are still languishing at 1.6% for Q1. Additionally,
through the current GDP deflator method, we may be even imparting an upward
bias to it," the report says.
During the first
quarter of FY2019, nominal non-agri GVA expanded to 14.0% from 11.5%
during fourth quarter of FY2017. However, during the same period,
nominal agro GVA declined to 7% from 10.9%.
SBI says, "We
believe that farm sector, especially crop sector, needs policy support and to
supplement the increased MSP, Government should enhance its effort to procure
crops. Apart from this, we strongly maintain that the agriculture sector
needs an immediate intervention like Bhavantar scheme besides the
MSP scheme recently launched."
Owing to significant
rise in manufacturing (13.5%) and construction (8.7%), industry grew by 10.3%
during first quarter of FY2019 from merely 0.1% in same quarter previous
year, due to low base and strong Q1 results. Real estate sector, which was
quite disturbed after the goods and services tax (GST) implementation, seems
to be reviving.
The manufacturing
growth rate in the Q1 has seen a huge jump of 13.5%. "While it may be
incorrect to out rightly reject this estimate, one is equally puzzled by it,
SBI says, adding, "Reasons for this scepticism are threefold. First, the
percent change in Q1 has been influenced by low base in Q1 of the last year.
If we make a correction for this, the growth rate will come down
substantially to 5% (base effect of 8.8%). Second, during Q1 FY2019, 33% of
the index of industrial production (IIP) components suffered net contraction.
The sectors that suffered contraction in IIP include - jewellery, copper,
textiles, and wearing apparel, rubber and plastics products. Some of these
sectors are top exporting sectors and highest employment contributors.”
“Furthermore the ‘other
manufacturing’ sector registered the largest decline of -35% in Q1. And
lastly, given the current accepted methodology for estimating quarterly
figures (including the use of IIP growth for unorganized sector), the direct
and indirect of impact of disruption in copper supply, pass through of rupee
depreciation by 5.4% has not been captured. Thus on a net the total
GDP growth rate has been impacted by this one estimate alone. This deficiency
in the methodology needs a careful study."
During the first
quarter, both total final consumption expenditure and gross fixed capital
formation increased. Total final consumption expenditure increased by 8.4%
mainly due to 8.6% growth in private final consumption expenditure. The good
thing is that gross fixed capital formation increased by a whopping 10.0% in
Q1 FY19 compared to 0.8% in Q1 GY18. However, some base effect cannot be
ruled out. The valuables, which increased in double-digits in FY18 (average:
60.7%) declined by 8.0% in first quarter, SBI says.
The services GDP grew
by 7.3% in Q1 FY2019, compared to 7.7% in Q4 FY2018 and 9.5% in Q1 FY2018.
Last year, the services GDP had grown at a robust pace due to the higher
growth of Trade sub-segment and professional services because of destocking
ahead of GST implementation in July 2017 and this has now moderated.
During Q1 FY2019,
growth in the ‘financial, real estate and professional services’ sector
declined due to the low contribution of the real estate and professional
services, which contributes around 74% of the growth in the sector.
Government is also
consolidating its expenditure as shown by tapering growth in public
administration, defence and other services. However, the Service sector data
is now proxied by MCA21 results and hence is much closer to reality and a
lower than 7.5% growth is a matter of concern, SBI adds.
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All you need to know about
India Post Payments Bank
The
Economic Times
Published
on September 2, 2018
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India's biggest bank in
the making
India Post have
launched its long-awaited payments bank by launching 650 branches across the
country today, making it the fourth such entity to start operations. The
India Post Payments Bank was launched by Prime Minister Narendra Modi.
What is IPPB?
The India Post Payments
Bank is a public sector company under the department of posts and ministry of
communication where the Indian government holds 100 per cent equity. The
payments bank will be governed by Reserve Bank of India. All the 1.55 lakh
post offices in the country will be linked to the IPPB system by December 31,
2018. Suresh Sethi is the managing director and chief executive of
IPPB.
What will it do?
IPPB will offer a range
of products such as savings and current accounts, money transfer, direct
benefit transfers, bill and utility payments, and enterprise and merchant
payments. These products, and related services, will be offered across
multiple channels (counter services, micro-ATM, mobile banking app, SMS and
IVR), using the bank's state-of-the-art technology platform. The plan is to
use all of India Post’s 1.55 lakh access points by December 2018 to provide
the service.
Tie up with
PNB Metlife and Bajaj Allianz
The IPPB will not offer
any ATM debit card. Instead, it will provide its customers a QR Code-based
biometric card. It has already tied up with PNB Metlife and Bajaj
Allianz to sell insurance products and hopes to enter into more financial service
partnerships.
Cabinet increases
spending
Earlier this week, the
cabinet had approved 80 per cent increase in spending for IPPB to Rs 1,435
crore, a move that will arm it with additional ammunition to compete
aggressively with existing players like Airtel Payments Bank and Paytm
Payments Bank.
About India Post
India Post has 1.55
lakh offices across the country, nearly 2.5 times the bank network. It
already has 17 crore post office savings bank accounts, some of which it
hopes will move to the payments bank.
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Stressed power assets: Panel
discusses issues, RBI plays truant
The
Financial Express
Published
on September 2, 2018
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New Delhi, September 1:
The empowered committee on stressed power assets, which met here for the
first time on Friday, deliberated on possible changes in fuel allocation
policies, regulatory frameworks and solutions to the vexed issue of irregular
payments from discoms. It also discussed a payment security mechanism
for independent power companies, which has been a long-standing demand of
private power firms, sources said.
The panel, however,
could not make significant headway as no representative from the Reserve Bank
of India (RBI) turned up. On the agenda was a proposal to set up an asset
reconstruction company (ARC) to take over banks’ stressed power assets.
Implementation of the Pariwartan scheme— the ARC plan formulated by
the Rural Electrification Corporation— requires amendments to the relevant
RBI regulations.
The Allahabad High
Court, while refusing a special waiver to the power sector from the RBI’s
February 12 circular on Monday, had directed the committee to come up with a
report by September end.
The HC also asked the
power ministry to invite a senior RBI official to be a part of the committee.
As reported by FE
earlier, the government is also unlikely to direct the RBI, using its powers
under the Section 7 of the RBI Act for the first time, to give special relief
to power sector from the central bank’s February 12 circular. The RBI
directive was that if a resolution plan was not found by August 27, insolvency
proceedings must be invoked against defaulting companies.
According to the power
ministry’s assessment, a large chunk of the 34 coal-based projects— with a
combined capacity of about 39 gigawatts and banks’ exposure of Rs 1.75 lakh
crore — would be taking the insolvency route. Analysts estimate resolution
under this process could result in hefty haircuts of up to 70% for banks.
According to the
finance ministry, less than a dozen companies could get impacted by the
circular, half of which could revived and the rest might be dragged to
insolvency court.
Representatives from
the ministries of power, coal, finance and railways along with the heads of
lenders of the State Bank of India, Punjab National Bank, ICICI Bank, Power
Finance Corporation and Rural Electrification Corporation are also a part of
the committee. Friday’s meeting, which lasted for more than 90 minutes, was
held at Cabinet secretary PK Sinha’s office.
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The new regime at RBI under Urjit Patel
Tamal
Bandyopadhyay
The
Mint
Published
on September 3, 2018
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RBI
governor Urjit Patel knows his onions and will not
surrender
the Reserve Bank of India’s independence
Urjit Patel completes
his second year as Reserve Bank of India (RBI) governor on Tuesday. Not too
many finance ministry bureaucrats seem to be fond of him. Ditto bankers. The
reasons are different though. Patel’s predecessor Raghuram Rajan took over in
the thick of the taper tantrum and D. Subbarao, who Rajan succeeded, had seen
the collapse of Lehman Brothers Holdings Inc. a few days after he took over.
For Patel, demonetisation was baptism by fire.
He got a lot of flak
for it but on previous two occasions too (1946 and 1978), the past RBI
governors—C.D. Desmukh and I.G. Patel —could not prevent
demonetisation. It was a government move like the 1969 bank nationalization,
of which then RBI governor L.K. Jha was kept in the dark till the last moment.
To his credit, Patel
has not wavered from his mission of inflation-fighting and cleaning up the
mess of bad loans. And, he calls a spade a spade even though it’s not music
to the ear for the government—that is, of course, when he decides to speak.
Unlike in the past, the
RBI monetary policy is no longer a governor’s policy. The six-member monetary
policy committee (MPC) now takes the call. The framework has been put in
place following the suggestions of an expert panel, headed by Patel himself.
Since June, the policy rate has been raised twice and, at every policy
statement, Patel reiterates his intolerance for inflation moving beyond the
medium-term target of 4% within a band of +/- 2%.
In his first year, he
spurned the invitation of the finance ministry for a meeting with the MPC
members and made public his displeasure with the farm loan waivers announced
by states. In the second, the skirmishes continued while the issues have
changed. They, in fact, intensified after Patel said regulatory power should
be ownership-neutral. His argument is all commercial banks are regulated by
RBI under the Banking Regulation Act but the public sector banks (PSBs) are
regulated by the government too, their majority owner. This restrains RBI
from exercising certain powers which it has over the private banks.
Many interpreted this
as Patel’s attempt to cover up the perceived failure of the banking regulator
to prevent frauds. Has he said anything new? It was just a reiteration of
what a government-appointed panel, headed by former RBI governor
M. Narasimham, had pointed out 27 years ago—the dual control over the
banking system of the finance ministry and RBI should end. While most of the
recommendations of the Narasimham panel have been implemented, the
government has been ignoring this.
While briefing a
parliamentary panel whose members include former prime minister Manmohan
Singh, Patel once again sought more powers to oversee the PSBs. He also said
no central bank nominee should be on the boards of PSBs to avoid “any
conflict of interest”.
The list of issues on
which RBI and the government have differing views is long. Despite the
government’s nudge, the central bank has not diluted its stand on taking the
power sector defaulters to the National Company Law Tribunal. The government
seems to want RBI to take a relook at its prompt corrective action norms
which do not allow weak banks to expand business. RBI cannot afford to dilute
the bad loan recognition and resolution norms for defaulters in the power
sector as that will compromise the sanctity of the Insolvency and Bankruptcy
Code, a watershed towards improving the credit culture in India.
The new RBI, under
Patel, has zero tolerance for non-compliance. The board of Axis Bank had to
cut short its CEO’s tenure while Yes Bank is anxiously waiting for another
term of its CEO who has been asked to continue “till further notice”. The
promoters of two small finance banks have stepped down as CEOs as they
couldn’t conform to ownership norms. Kotak Mahindra Bank’s plan to dilute the
promoter’s stake has not got the central bank’s nod. For banks, the days of
regulatory forbearance are over.
One can always argue
that the new regime is too harsh on PSBs; the bad loans were created over a
period and the banks should be given more time to deal with them. But that’s
the headache of their majority owner, not the regulator. The government needs
to decide on their fate—whether to use euthanasia for some of them or nurse
them back to health by ensuring capital, independence of their boards and
governance.
While the bankers are
finding him too tough, the bureaucrats see him as reticent and analysts call
him non-communicative, the key takeaway from his first two years is that
Patel knows his onions and will not surrender the central bank’s
independence.
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PM Modi Blames Previous UPA Govt
for Mounting NPAs in Banks
Javed Saifi
The
News World Online
Published
on September 2, 2018
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New Delhi, September 2:
On rising NPAs (Non-Performing Assets) in the banking system of the country
Prime Minister Narendra Modi on Saturday blamed the previous UPA government.
PM Modi said, “There
was a time when a strategy was adopted to obtain loans from banks and that
was loan after phone or say phone banking.”
“It was one step for a
businessman to obtain a loan and that was 'call the Congress family',” he
added.
Citing the stats of
NPAs PM had said, “Since Independence to 2008 only Rs 18 lakh crore was given
but after 2008 that amount rose to Rs 52 lakh crore in six years thereafter.”
Criticizing the
previous UPA government PM also said, “Just a few days after our government
came to power, we realised that the Congress had left the nation’s economy on
a landmine.”
“The loan given at the
behest of one family will soon be recovered,” PM said.
A day after PM Modi
allegations, former Finance Minister P Chidambaram at the time of UPA
government Tweeted, "Let's assume that PM is right when he says that
loans given under UPA have turned bad. How many of those loans were renewed
or rolled over (that is 'evergreened') under NDA?"
“How many loans and how
much that was given after May 2014 have become
non-performing assets?," Chidambaram said.
"This question was
asked in Parliament but there is no answer so far,” he added.
Concluding the speech,
PM Modi had appraised Q1 economic growth of 8.2 percent and said,
"Yesterday’s GDP numbers indicate the good health of the Indian economy.
India remains a bright spot among global economies and we remain committed to
continuing the growth and reform trajectories in the times to come."
PM Modi was speaking at
the launch of India Post Payments Bank (IPPB).
NPAs crisis
The NPAs crisis in the
banking can be considered to be getting out of control because banking sector
has been going through bad economic times due to rising non-performing assets
that already touched Rs. 8.99 trillion which account to 10.11 percent of the
total advances at December end 2017.
On August 19 Former
Reserve Bank of India governor Raghuram Rajan had been asked by a
parliamentary committee headed by BJP leader Murali Manohar Joshi to appear
before it and brief on mounting non-performing assets (NPAs).
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How India's cash ban failed even
to create a bank savings culture
Mihir
Sharma (Bloomberg)
The
Business Standard
Published
on September 3, 2018
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For
most Indians, the defining experience of
demonetization
was losing access to their bank accounts
The Indian central
bank’s final tally of Prime Minister Narendra Modi’s 2016 demonetisation
drive, intended to take money derived from tax evasion out of circulation,
showed that 99.3 per cent of outlawed high-value banknotes had been returned.
That’s a severe loss of face for officials, who had argued that holders of
the cash would rather destroy it than return it to banks, providing a
windfall for the government.
The authorities managed
to produce several other defences of the initiative, however. One in
particular was appealing to financial markets: The notion that, in Finance
Minister Arun Jaitley’s words, “demonetisation appears to have led to an
acceleration in the financialization of savings.” Households that
traditionally kept their savings in cash would now prefer to put the money
into other instruments, perhaps even the stock market. This would increase
the amount of capital available for companies to deploy and banks to lend,
spurring economic growth.
There certainly were
some indicators to support the idea. For one, Life Insurance Corp. of India
saw a 142 per cent increase in premium collection in the month demonetisation
was carried out. And Indian stocks have been on a record-breaking run, even
though foreign investors were net sellers so far this year.
Unfortunately, the
Reserve Bank of India punched a hole in that hypothesis, too. Its annual
report, as well as tallying the result of demonetisation, provided a
breakdown of savings by households, a category that includes small and
unregistered enterprises. It turns out that net financial savings for the
fiscal year that ended March 31 were 7.1 per cent of overall disposable
income— less than the average for the five years prior to demonetisation.
Worse yet, perhaps,
households are keeping far more of their net savings in cash, not less. And
their net savings going to banks are almost 50 per cent lower than the
five-year average before demonetisation. In other words, the idea that the
crackdown would leave banks flush with household savings that they could lend
to productive parts of the economy has been comprehensively debunked.
What’s going on?
Some have argued that
lower interest rates are the problem. That’s not an easy sell: Over the past
year, India was one of the few countries with strongly positive real rates —
and savings in bank deposits were a higher fraction of disposable income back
in 2012-14, when Indians were dealing with negative real interest rates.
Perhaps, instead, a
change in behaviour is responsible. For most Indians, the defining experience
of demonetisation was losing access to their bank accounts: We had to stand
in long lines at ATMs, and our withdrawals were strictly rationed. In
contrast, those who had piles of old banknotes appeared to be able to change
them (at a black-market-determined discount) with ease.
What would you learn
from this?
Would you trust a
banking system that can be closed down on a prime minister’s whim? For many
Indians, demonetisation provided their first experience of banks or digital
payments. I just hope the insanity of the process didn’t put them off formal
finance forever.
Still, you might say,
at least the markets are doing well. That reflects households’ greater
willingness to put their savings in stocks, right? And yes, the RBI data do
indeed suggest that.
But look a little
closer and things aren’t so bright. One of the reasons domestic institutional
investors — who pumped $10 billion into Indian markets so far this year,
while foreigners took $280 billion out — are bullish is because they believe
a structural change is under way in how Indians save. They think we’re moving
permanently away from cash (and gold, and real estate). A turn toward
financialization means ever-higher equity prices.
The central bank data,
however, suggest we shouldn’t be so sure about that. The heights being scaled
by Indian markets might prove brittle.
Whatever the impact on
savings behaviour of demonetisation, it’s clear the initiative was a policy
failure, even on the administration’s own terms. I’d like to think a lesson
was learned.
Not so fast: The
government just appointed one of the brains behind the 2016 project to the
board of the central bank. India’s era of ill-advised intervention may not be
over.
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Telecom’s dying, forget about a new auction,
telcos might default on existing
spectrum payments, will Modi fix it?
Sunil
Jain
The
Financial Express
Published
on September 3, 2018
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Even more worrying
for the government—apart from the hit that government-owned banks will take
when telcos go belly up—is the ability of telcos to make
good their spectrum payment obligations from earlier auctions.
When India’s top
telecom company, Bharti Airtel features in Credit Suisse’s list of stressed
companies, with an interest cover (Ebit-to-interest) of less than one, you
realise just how financially stressed the telecom sector is. With an interest
repayment obligation of Rs 2,550 crore in Q1FY19 and an Ebit of Rs
1,581 crore, Airtel’s interest cover is a mere 0.6. Idea, which has just got
final clearances for its merger with Vodafone, had a
negative Ebit in Q1, so its interest cover is much worse.
Indeed, according to
Credit Suisse, all telecom debt in the country is owed by companies that have
an interest cover of less than one; that is a pretty scary thought for the
country’s banks. This ratio of 100% today was 55% just a year ago and 35% two
years ago in Q1FY17.
With the industry’s
health falling so dramatically, the impact on government revenues is also
significant. After rising from Rs 131,602 crore in 2011 to Rs 198,206 crore
in 2016, the sector’s gross revenues are estimated at Rs 142,789 crore this
year, and as a result of this, revenues accruing to the government have
fallen by around 37% in just the last two years, to a likely Rs 36,291 crore
this year from Rs 57,673 crore in 2016. While around a third of this took
place due to lower annual licence fees and spectrum charges as the industry’s
revenues fell, two-thirds was due to the fact that, with no auctions in 2017
and 2018, the government didn’t get any upfront money in those years—as per
the terms of auctions, an upfront payment is made in the year of the auction,
and the balance is spread out after a moratorium of a few years.
This source of
government revenue is likely to keep declining since, given the state of the
industry’s finances, it is unlikely there can be an auction next year either;
whether it takes place in 2020 will depend on whether things pick up. Even
more worrying for the government—apart from the hit that government-owned
banks will take when telcos go belly up—is the ability
of telcos to make good their spectrum payment obligations from earlier
auctions. Between Vodafone and Idea, for instance, Rs 10,579 crore has to be
paid to the government each year from now to 2030, with a small dip in 2031.
In FY18, however, their combined Ebitda earnings were just Rs
13,803 crore; while that is sufficient to pay for the spectrum,
the Ebitda has to be used to make good interest payments on other
debt as well as for amortising spectrum purchases. While the hope is that
earnings will pick up, how quickly this will happen is not clear since, a
year ago, the Ebitda earnings for the two telcos was Rs
22,017 crore; of course, once the two merge operations, there will be
operational synergies and that will drive up Ebitda. Once Indus Towers
is sold, Airtel, Vodafone and Idea will also be able to retire some part of
their non-government debt with the proceeds.
All this, of course,
presupposes telcos will not buy any more spectrum; should this
happen, the equation becomes even more precarious. Amazingly, despite the
sector’s fragile finances, the telecom regulator, Trai, talks confidently
about the rollout of 5G services soon. Indeed, Trai continues with
its policies of outrageously expensive spectrum due to the fact that, by and
large, it uses the bid value of the last auction as the reserve price for the
next. It does not make any adjustment for the fact that telcos may
have bid exuberantly in the past, as they did when 3G technology came or due
to the fact that, more often than not, the government puts too little
spectrum on auction.
This time
around, Trai has put a reserve price of Rs 492 crore per MHz of 5G
spectrum despite the fact that, just last month, this was auctioned for Rs
130 crore in South Korea where subscribers pay much higher monthly fees than
in India. Thanks to Trai’s illogical pricing, on average, 38% of
all spectrum put on auction since 2010 has remained unsold; the figure was as
high as 67% in 2012, 100% in 2015 and 59% in 2016. Given that the government
has given the Trai chief an extension, though—this is unheard of
since regulators, by law, are proscribed from getting government jobs after
their initial tenure—it would suggest it doesn’t feel he is in any way
responsible for the sector’s mess. And since the government has not done
anything in the last four years, it is not clear it will make any meaningful cuts
in the revenue-share it takes from the sector either—even without including
GST, the government share of telecom revenues rose from 12% in 2011 a likely
25% this year. Once the darling of investors, the sector is today on its last
legs.
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The Indian economy needs policy protection
Editorial:
The Mint
Published
on September 3, 2018
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The
external environment in the near term may not be
as
supportive as it has been in recent years
The pace of expansion
in the Indian economy once again surprised analysts on the upside. The gross
domestic product (GDP) data, released on Friday, showed that the economy grew
at 8.2% in the first quarter of the current fiscal. Although this was on a relatively
lower base, data suggests that the economy has recovered well from the twin
policy shocks of demonetization and the implementation of the goods and
services tax (GST).
The growth during the
quarter was fairly broad-based. For instance, the agriculture sector expanded
by 5.3%, while manufacturing registered a growth of 13.5%. Construction
activity expanded by 8.7%. It is also encouraging to see that investment
demand is picking up. Higher private sector investment will help improve
potential growth. However, the big question is: Can the growth momentum be
sustained?
The headline growth is
likely to moderate in the second half of the fiscal because of the base
effect. Also, there are a number of factors that will require close
monitoring and can affect economic outcomes in the coming quarters.
First, financial
conditions in the international market are tightening, and the cost of money
is likely to go up. Further, the rupee is depreciating, and renewed pressure
on emerging market currencies over the last few days indicates that things
may not stabilize in a hurry. All this could affect businesses looking to
raise capital from international markets. Although the Indian banking system
is said to have entered into the final phase of the bad loan problem, it is
likely to take some time to stabilize before it begins to fund India’s
growth. Besides, trade tensions are a big risk for the global economy and can
affect growth at a time when India’s exports are showing signs of a
turnaround. Therefore, in the coming quarters, the external environment may
not be as supportive as it has been in recent years.
Second, fiscal
constraints may not allow the government to push growth. Last week, for
example, Moody’s Investors Service highlighted the risk that the Union
government might miss the fiscal deficit target. Higher oil prices and
relatively higher minimum support prices could push expenditure, while the
reduction in GST rates could affect revenues. The Union government is aiming
to restrict the fiscal deficit at 3.3% of GDP in the current year.
Further, state
government finances have worsened in recent years. Although they are looking
to reduce the fiscal deficit in the current year, as the Reserve Bank of
India (RBI) noted in its annual report, risks could arise from farm loan
waivers announced outside budget allocations, and impending elections in several
states. Pressure on government finances could lead to a reduction in capital
expenditure. However, it is important that government finances be carefully
managed and deficit targets maintained, even if this requires sacrificing
some amount of growth in the short run. In the given global context, fiscal
slippage along with higher current account deficit could affect market
sentiment and increase risks to macroeconomic stability. Sustained pressure
on capital flows will impede investment revival and affect growth in the
medium term.
Third, further monetary
policy tightening could be in store. Although the monetary policy committee
(MPC) of RBI has raised rates pre-emptively, a pick-up in economic activity
can increase the risk of higher core inflation getting generalized. Thus, the
dilemma for the MPC in the October meeting will be whether it should wait and
see the effect of its past policy action or move forward with another hike to
contain aggregate demand. Capacity utilization is increasing, which will give
firms more pricing power, and the MPC believes that the output gap is
virtually closed.
However, this is not
the only risk. The pressure in the currency market might also warrant a
monetary policy response. The MPC has maintained that the policy is determined
only by the inflation-targeting mandate and a rate hike may be needed even to
avoid inflationary consequences of depreciation in rupee. If the MPC decides
to leave the rates unchanged in the October meeting, it will have to wait
till December to make its next move, as an out-of-turn rate action will
affect market confidence. Things will become clear in the coming weeks, but
further policy tightening cannot be ruled out at this stage. Therefore,
despite the positive surprise, growth numbers should be interpreted with
care, as the given macroeconomic situation, particularly on the international
front could pose challenges. The situation requires policymakers to remain
vigilant and preserve macroeconomic stability. A significant increase in
currency market volatility can dent market confidence and affect investment
decisions.
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Consumption-driven GDP growth
unhealthy for Indian economy
Manas Chakravarty
The
Mint
Published
on September 3, 2018
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A
consumption-driven growth not only fuels inflation,
but also can
arguably lead to a slackening of future growth
Economic growth of 8.2%
for the June quarter may have beaten all estimates, but the big question is:
what kind of growth is it? Is the economy firing on all the engines of
domestic consumption, investment demand and external demand?
Let’s look at the
numbers. The anecdotal evidence of a spurt in consumption growth is certainly
borne out by the GDP data. Private final consumption expenditure (PFCE)
growth rose to 8.6% in the June quarter from 6.7% in the preceding March
quarter. What’s more, the growth rate has increased despite an unfavourable
base—PFCE growth in the June 2017 quarter had jumped to 6.9%, compared to
growth of 4.2% in the March 2017 quarter.
Sliced another way, the
data shows that private consumption was 54.9% of GDP at constant prices in
the June quarter, compared to 54.6% in the March quarter. Clearly,
consumption growth is very strong.
What about investment
demand? We have been waiting endlessly for investment demand to pick up and
do the June numbers show it’s finally happening?
To be sure, the 10%
growth in gross fixed capital formation, at constant prices, certainly looks
impressive. But here’s the catch: in the March quarter, gross fixed capital
formation (GFCF) growth was even higher, at 14.4%. Was that due to a lower
base? It wasn’t—the March quarter year-on-year growth in GFCF of 14.4% was on
top of 5.95% growth in the March 2017 quarter. But the June 2018 quarter’s
GFCF growth of 10% was on top of a piffling 0.8% growth in the June 2017
quarter. Simply put, growth in gross capital formation in the June quarter
slowed down, in spite of a favourable base effect. In other words, there’s
been a loss of momentum in investment demand in the June quarter.
A rather simpler way of
saying the same thing is to point out that GFCF amounted to 32.2% of GDP at
constant prices during the March 2018 quarter and this slipped to 31.6% of
GDP in the June quarter. That fits in with anecdotal evidence of capital
formation largely being driven by government orders, with the private sector
still lukewarm to greenfield investments. The Reserve Bank of India’s
recently published annual report talked of green shoots in infrastructure,
but also said, “Stalled projects, both in numbers and value, declined in
Q1:2018-19; however, new investments remained lukewarm uniformly across the
government and the private sectors.” The hope is this trend will soon change.
What about the external
sector? As the chart shows, the trade deficit on goods and services shot up
sharply, partly due to higher crude oil prices, but also on account of other
imports. The drag on GDP from the external sector continues to increase.
In short, the June
quarter numbers indicate that consumption is still driving the Indian
economy. Consumption growth has been aided and abetted by the rise in
personal lending. As RBI’s annual report pointed out, liabilities of the
household sector went up from 2.4% of gross national disposable income in
2016-17 to 4% in 2017-18. RBI’s figures for sectoral deployment of credit
from banks show that as of 31 July, credit card outstandings were up 30%
year-on-year, on top of a 32% growth in the preceding year.
What is the consequence
of this consumption-led growth? Inflation according to the GDP deflator—the
most comprehensive measure of inflation in the economy—moved up to 4.8% in
the June quarter from 2.4% in the March quarter. There are strong reasons for
RBI hiking interest rates.
It is imperative for
investment demand to pick up in the near future. Otherwise, as a section of
RBI’s annual report last year titled Is consumption-led expansion
sustainable? A case study of India pointed out, “Consumption-led growth can
arguably lead to a slackening of future growth if it entails growing
imbalances due to limits to capacity creation, and rising debt burdens,
particularly for households.”
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Source: Internet Newspapers and Anupsen articles
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