In just over a month, the Finance Minister, Nirmala Sitharaman, will present what she has announced as “a Budget like never before.” As a year ends like never before, there are questions about the way forward, even if the budget, or any political intervention by the government in the coming months, can offset the disappointing response of fiscal stimulus to the situation brought on by the pandemic. . And if other headwinds could potentially circumscribe the rebound in economic growth.
Even as industrial production rebounded as the economy reopened, driven by stifled demand and a boost to festival spending, consumer confidence remains weak. Job prospects are tepid and household income remains suboptimal. Stimulus-driven investment flows from the US and Europe have regained appetite for risk, sending a flood of safe-haven assets to equity markets and emerging market economies. India is a net winner; indeed, if financial market optimism were combined with the tribulations of the real economy, a structural disconnect of epic proportions would appear to emerge – the equivalent of an Arnold Schwarzenegger torso on Woody Allen’s legs, inherently wobbly and likely to collapse. .
Express Illustration: Suvajit Dey
THE TAIL WINDS
* First, the positives: the release of NSO GDP data for the quarter ending in October 2020 yielded a surprising result: the slowdown in the second quarter turned out to be shallower and the pace of recovery outpaced most of the predictions, broadly aligning with high-frequency indicators pointing to a rebound in economic momentum. An update to the RBI’s economic activity index also projected that real GDP growth was expected to “explode into positive territory in the third quarter,” albeit at a meager 0.1 percent.
* A sectoral split shows that capital goods and automobiles, which were hit hard by the lockdown, could be experiencing a shift in future earnings. Healthcare, IT and consumer goods companies have stronger earnings prospects. Digital technologies are seen as a bright spot.
* Despite the challenge of a new wave of infections, the outcome of the US presidential election and positive news about vaccines could have a sustained impact on the outlook for the world economy. A positive outcome of the Brexit negotiations is an advantage.
* Stock markets, which wavered between rallies and sell-offs until early November, have broken past previous highs. According to the Institute of International Finance, portfolio flows to emerging market economies or EMEs, including India, amounted to $ 76.5 billion in November, shared almost equally by equities and debt ($ 39.8 billion and $ 36.7 billion). dollars respectively). The fourth quarter of 2020 is projected to be the strongest quarter for EME inflows since the first quarter of 2013, since just before the tantrum. Indian markets are a huge beneficiary: so far this year, as of December 20, 2020, the S&P BSE Sensex and the Nifty50 are up more than 13% and 12% respectively.
* Above all, India is bending the Covid curve: since mid-September, barring localized surges, infections have sloped down every week and the recovery rate is close to 95%. At least a couple of candidate vaccines have reached not only test status, but also suitability for use in India, with more in the works.
THE RED FLAGS
* Demand conditions remain weak, evidenced by the drop in exports and imports, which reflect the state of external and internal demand, according to NCAER. The RBI consumer confidence survey for November showed that while consumer confidence was higher that month than in July and September 2020, confidence was lower in November compared to the same period a year earlier.
* Imminent political weakness is evident on both the supply and demand sides. On the demand side linked to GDP, the most recent data shows a 22 percent contraction in government final consumption spending in the second quarter, while on the production side of GVA (gross value added), Public administration, defense, and other service sectors: A proxy for public spending – fell 12 percent in the second quarter after a 10 percent drop in the first quarter. The trend points to the reluctance of the central and state governments to provide a boost to fiscal spending to balance the drop in investment demand.
* India’s growth had been moderating since the beginning of the fourth quarter of 2018-19. The government’s reluctance or inability to do the heavy lifting is a concern, both in terms of a sentiment boost and a trigger to catalyze the broader investment push. This would remain a challenge, given that in 2020-21, the Center’s gross tax revenue is projected to decline by more than 10%, in addition to the 3.4% drop in 2019-20. Non-tax revenues appear bleak. States, burdened with higher health spending and locked in a fight with the Center over GST payments, are unlikely to restart the investment cycle. If demand conditions cannot be revived, the private sector is not expected to restart investments or contracting, which would further deteriorate demand conditions. In the absence of a counterbalance momentum, the problem could become cyclical.
* As the government largely refrained from providing substantial business income support, jobs were lost as the income of MSMEs suffered. The third quarter of fiscal year 2020-21 will end with an employment of 395 million, which would be 2.5% less than the 405 million employees in the December quarter of 2019, according to data from the CMIE. Given that around 45 percent of manufacturing occurs in MSME units, this sector is key for the reactivation of manufacturing. But only MSMEs registered under the Factories Act 1948 are actually included in the Industrial Production Index, while almost half are unregistered manufacturing units. For GDP data, the methodology that NSO implements to use the PII as a proxy to estimate the value of that missing component is much more distorting during a situation such as the lockdown, which especially affected smaller companies. The actual image will only appear with a delay.
* Reach out to service sectors such as hotels, restaurants, airlines, beauty salons, which were doing exceptionally well before the pandemic, are among the worst affected and will continue to fight until the fear of the virus lasts.
* CMIE employment data point to worrying trends. When the restrictions were lifted, many of those who did not find work left the workforce. Generally, when more people find work, they should come looking for more people. But the opposite seems to have happened since September. Furthermore, CMIE surveys up to August show that the greatest job losses occur in quality jobs: salaried employment. Women have been more affected.
* Inflation has been a problem for Indian policy makers. The RBI in its December monthly bulletin highlighted the risks of continued high inflation: “… More needs to be done to criticize the ‘worm in the apple’ – inflation – before it damages the growth impulses that are underway. rooting “. According to Nomura, retail inflation is unlikely to drop enough for the RBI to cut rates in all of 2021. In the medium term, there are chances that inflation will heat up again, and the RBI may also have to switch to rates increasing in 2022.
LOOKING TO THE FUTURE
* Sitharaman has said that “investment in research and development in medicine, biotechnology and pharmaceuticals is the need of the moment.” North Block appears to be preparing an infrastructure boost, backed by some of the dust it has kept dry. A production-linked incentive scheme to drive “self-sufficiency” is being billed as a model for a manufacturing drive. But there are obstacles. The industry is observing resolution efforts at Wistron’s iPhone manufacturing facility in Karnataka, where violence broke out at a time when it seeks to replicate limited success in the smartphone assembly sector in the pharmaceutical industry and in the cars, and when there are continuous labor unrest at Toyota Kirloskar. Engine plant on the outskirts of Bengaluru.
* Investors are also watching the government’s reactions to legal setbacks in the Cairn and Vodafone retrospective tax cases. India has chosen to challenge the Vodafone verdict, and a challenge is also expected in the Cairn case.
* There are concerns about the financial sector. Since April, with the entry into force of the moratoriums, the recognition of non-compliance has been delayed. It’s a double whammy for the industry: The loans have gone bad, even if they are not being recognized as NPAs, but the lender does not get the interest in cases where the companies have withdrawn. When EMIs are stopped, banks’ interest income suffers and their net interest margin is reduced. The profitability of the financial sector is shrinking and, without a massive recapitalization, the sector could end up being a drag on the economy in the future.
* According to the IMF, the economy is likely to contract 10.3 percent in the current fiscal year and then grow 8.8 percent in 2021-22. But while real GDP is expected to rebound, it may take nearly two years for it to return to pre-pandemic levels. According to estimates by JP Morgan’s Emerging Markets Director Jahangir Aziz, at the end of fiscal 2021-22, the economy could be 10% lower than the pre-pandemic growth path.
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* There is a more fundamental problem related to the timing of a fiscal stimulus. 2020-21 was the year of the pandemic, and if India had racked up a large fiscal deficit due to a stimulus, it would have been in line with all other major economies, and the rating agencies would not have downgraded India on the size of spending. . . According to Pronab Sen, India’s former chief statistician, any pullback in stimulus spending that lasts into the following year or beyond would run the risk of India being considered an outlier.
All eyes on the budget for now.
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