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Banking News Dated 3rd September 2018

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Banking News: September 3, 2018


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SBI hikes lending rates by 20 basis points


SBI hikes lending rates by 20 basis points

The Indian Express
Published on September 3, 2018


Mumbai, September 2: State Bank of India (SBI), the country’s largest bank, on Saturday increased its benchmark lending rates, or marginal cost of funds-based lending rate, by 20 basis points. As a result, home, auto and other personal loans will become costlier for customers as most of the retail loans are benchmarked against one-year MCLR.


Other banks are all set to hike the rates in the coming days.

SBI has increased the lending rate by 20 basis points across all tenors up to three years. The bank’s overnight and one-month rate now stands at 8.1 per cent as against 7.9 per cent. The MCLR for a one-year tenor rose to 8.45 per cent from 8.25 per cent earlier.

The MCLR for a 3-year tenor increased to 8.65 per cent from 8.45 per cent. On August 1, 2017, the RBI had raised the interest rate by 25 bps for the second time in two months to contain inflation in an election year. The rate hike in June was the first time the benchmark lending rate was raised in over four years. This is now the first time since October 2013 that the central bank has raised the repo rate at two consecutive policy meetings.

On September 2, mortgage lender HDFC hiked rates on home loans by 20 basis points. Union Bank of India, Kotak Mahindra Bank and Karnataka Bank also increased their MCLR by 5-10 basis points in early August.


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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


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


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


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


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


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


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


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


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


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.”

Source: Internet Newspapers and Anupsen articles

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