Lecture on Global & Indian Economy delivered at CII conference,
Hyatt Regency, Pune on 28th August 2019
Global Economy… UN - Economic Analysis & Policy Division
- by CMA Amit Apte
Escalating trade policy disputes pose short-term threats…
Over the course of 2018, there was a significant rise in trade tensions among the world’s largest economies, with a steep rise in the number of disputes raised under the dispute settlement mechanism of the World Trade Organization. Moves by the United States to increase import tariffs have sparked retaliations and counter-retaliations. Global trade growth has lost momentum, although stimulus measures and direct subsidies have so far offset much of the direct negative impacts on China and in the United States. A prolonged episode of heightened tensions and spiral of additional tariffs among the world’s largest economies poses considerable risk to the global trade outlook. The impact on the world economy could be significant: a slowdown in investment, higher consumer prices and a decline in business confidence. This would create severe disruptions to global value chains, particularly for exporters in East Asian economies that are deeply embedded into the supply chains of trade between China and the United States. Slower growth in China and/or the United States could also reduce demand for commodities, affecting commodity-exporters from Africa and Latin America. There is a risk that the trade disputes could aggravate financial fragilities, especially in some emerging economies. Rising import prices, coupled with tighter financial conditions and high debt-servicing costs, could squeeze profits and cause debt distress in certain industries.
An abrupt tightening of global financial conditions could spark localized financial turmoil…
Rising policy uncertainties and deepening country-specific vulnerabilities generated bouts of heightened financial market volatility in 2018. Investor sentiments were affected by escalating trade tensions, high levels of debt, elevated geopolitical risks, oil market developments, and shifting expectations over the monetary policy path of the United States.
Against this backdrop, global financial conditions are experiencing some tightening. In the current uncertain environment, any unexpected developments or sudden shift in sentiment could trigger sharp market corrections and a disorderly reallocation of capital. A rapid rise in interest rates and a significant strengthening of the dollar could exacerbate domestic fragilities and financial difficulties in some countries, leading to higher risk of debt distress.
Considerable uncertainty surrounds the monetary policy adjustment path in the developed economies, particularly the United States. Against a backdrop of an increase in import tariffs, a strong rise in inflationary pressures could prompt the United States Federal Reserve to raise interest rates at a much faster pace than currently expected, triggering a sharp tightening of global liquidity conditions. The possible failure of policymakers in Europe to finalize legal and regulatory arrangements in advance of the intended withdrawal of the United Kingdom from the European Union in March 2019 poses risks to financial stability, given the prominence of European banks in driving global cross-border financial flows. Recent policy easing in China, while likely to support short-term growth, could exacerbate financial imbalances.
Climate risks also threaten economic prospects, especially for small, island developing States
Climate risks are intensifying, as the world experiences an increasing number of extreme weather events. Over the last six years, more than half of extreme weather events have been attributed to climate change. Climate shocks impact developed and developing countries alike, putting large communities at risk of displacement and causing severe damage to vital infrastructure. The human cost of disasters falls overwhelmingly on low income and lower-middle-income countries. Many small island developing States (SIDS) in the Caribbean and Indian and Pacific Oceans are particularly exposed to climate risks, through flooding, rising aridity, coastal erosion and depletion of freshwater. Climate related damage to critical transport infrastructure, such as ports and airports, may have broader implications for international trade and for the sustainable development prospects of the most vulnerable nations.
All these global risks are bound to have their impact on India…trade war, Increase in interest rates in USA, Brexit, climate change, etc.
India has emerged as the fastest growing major economy in the world and is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy. Captive consumption due to the large population of 1.3 billion plus consumer’s cushions India from the global turmoil. India’s GDP was estimated to have increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19. India has retained its position as the third largest startup base in the world with over 4,750 technology start-ups.
India's foreign exchange reserves were US$ 405.64 billion in the week up to March 15, 2019. They have steadily risen to $430.50 billion in August.
With the improvement in the economic scenario, there have been various investments in various sectors of the economy. The M&A activity in India reached record US$ 129.4 billion in 2018 while private equity (PE) and venture capital (VC) investments reached US$ 20.5 billion. Some of the important recent developments in Indian economy are as follows:
During 2018-19 (up to February 2019), merchandise exports from India have increased 8.85 per cent year-on-year to US$ 298.47 billion, while services exports have grown 8.54 per cent year-on-year to US$ 185.51 billion.
Net direct tax collection for 2018-19 had crossed Rs 10 trillion (US$ 144.57 billion), while goods and services tax (GST) collection stood at Rs 10.70 trillion (US$ 154.69 billion).
Consumer Price Index (CPI) inflation is also very much in control and steadily less than 3% for quite some time now.Net employment generation in the country reached a 17-month high in January 2019.
The interim Union Budget and the final budget for 2019-20 focuses on supporting the needy farmers, economically less privileged, workers in the unorganised sector and salaried employees, while continuing the Government of India’s push towards better physical and social infrastructure.
Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.
However recently there is a clear indication that all is not well with the Indian economy. It should be noted that India’s economy grew by just 5.8 per cent in the first quarter of 2019, the slowest rate in the past 20 quarters. Most economists believed that the growth would be lower than 5.8 per cent in the second quarter. Moody’s Investors Service has cut India’s gross domestic product (GDP) growth rate to 6.2 per cent for calendar year 2019 against its earlier projection of 6.8 per cent. Even this estimate appears to be a tall order considering the present situation.
There has been substantial reduction in demand especially in Automobile sector, FMCG and real estate which has been in trouble for some time now.
The auto parts industry contributes 2.3 per cent to India’s GDP and employs more than 50 lakh people. Sales in auto sector have fallen in 12 of the 13 months since July 2018 signalling sharp slowdown in demand in the world's fourth-largest automobile market.
As per data published by Society of Indian Automobile Manufacturers (SIAM…
Sales of passenger vehicles to car dealers fell 30.9% to 2,00,790 units in July 2019 over July 2018 signalling a slump in demand from consumers. This was also the steepest since December 2000 when it had declined by 35.22 per cent. Commercial vehicles sales fell 25.7% to 56,866 units. Motorcycle and scooters sales fell 16.8% to about 1.51 million units, while passenger car sales fell 36% to 122,956 units. The Federation of Automobile Dealers Associations (FADA) released the July 2019 vehicle registration data, which showed that on a year-on-year (YoY) basis, the overall sales declined 6 per cent. Two-wheeler sales has dipped by 5 per cent, passenger vehicles (PV) by 11 per cent and commercial vehicles (CV) by 14 percent.
This huge gap in between dealer purchases and retail sale indicates that dealers are cutting down on the inventories being carried by them envisaging further reduction in demand by consumers.
Reasons for slowdown in automobile sector
Of course there are divergent views within the automobile industry with Rajiv Bajaj a very successful auto entrepreneur stating that "Most of the automobile slowdown is the industry's own making," According to him, a 5-7 per cent drop in retail sales in the two wheeler segments cannot be called a crisis. The industry has to look for new business models and innovative products to keep the market interested.
However many automobile and ancillary manufacturers have started laying off contract workers in anticipation of even severe issues ahead.
Of course the government has already made several announcements last week to give a boost to the economy. They have also stated that a few more announcements are likely in the coming days.
RBI's transfer of Rs 1.76 lakh crore surplus reserve
There has also been a lot of anxiety amongst many due to announcement by RBI that it will be transferring Rs. 1.76 lakh Crore of its surplus reserve to the government during the current fiscal year.
The central board of the apex bank gave its nod to transfer a sum of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), which was adopted at the meeting of the central bank. Even in 2018-19, RBI had paid the government Rs. 40,000 crore (Rs. 40,659 crore in 2017-18, Rs 65,896 crore FY16-17). This figure was budgeted at Rs. 90,000 crore during 2019-20.
Most of these reserves are maintained through gold reserves and foreign exchange assets, which collectively reflected as Currency and Gold Revaluation Reserve Account in the balance sheet of RBI. The RBI also stores a Contingency Fund (CF), which is another provision for tackling unexpected emergencies.
Coming to surplus funds, it is the amount RBI transfers to the government after meeting its own expenses. This surplus is basically RBI's income which it earns through interest on securities it holds.
The move is expected to help the government at a time when India is going through a period of economic slowdown, triggered by slower consumption demand and weaker investment.
However, economists remain divided over the new surplus transfer policy. Some economists had expected the RBI to release staggered payment to the government instead of everything in one shot.
Some economists have welcomed the move as it will help the government counter the shortfall in revenue and tax collection. Since inflationary pressure is low, economists believe that the move will not have a negative impact in the long run.
Another group of economists which include the likes of Mr. Raghuram Rajan and former RBI governor Mr. Urjit Patel said earlier that the move could put RBI in a vulnerable position apart from diminishing its autonomy.
Most economists are of the view that the government should reserve the amount and make up for the shortfall in tax and GST collections. A portion of the funds, according to economists, should be used to re-capitalize public sector banks as soon as possible.
My view is that the excess surplus transfer offers a great opportunity to the government to contain and even a lower fiscal deficit.
IBC, despite all its shortcomings, has changed the loan recovery landscape in the country. Just two years since its launch, IBC has resulted in resolution of 88 corporate loan default cases involving Rs 2.09 lakh crore non-performing assets (NPAs) and facilitated recovery of Rs 1.12 lakh crore as of 25 March 2019. This is a recovery rate of 54 per cent. Of course after IBC not all cases have been resolved within the stipulated time of 270 days. Some dragged on for much longer such as the Essar Steel Case, which lingered on for over 500 days. But still this is much better than the average time of 4.3 years it used to take before the advent of IBC regime. Of the 12 large cases -- including those of Essar Steel, Bhushan Steel and Alok Industries -- which accounted for unrecovered loans of Rs 3.45 lakh crore, six have been resolved. And have led to a loan recovery of Rs 96,000 crore, logging a healthy recovery rate of 56 per cent. There were around 4,000 cases involving Rs 2 lakh crore of outstanding loans, which were resolved even before the insolvency proceedings could start.
Earlier, the promoters of the defaulting company would drag on the process stripping the company of its value and net worth, leaving little for the creditor to recover.
Under IBC, as the creditors are now in control, they want early resolution and maximum recovery.
The law is such that once insolvency proceedings begin under the IBC, against the loan defaulters, promoters of these companies lose control of the company. This instills fear among 'willful' defaulters and establishes more responsible credit behaviour among borrowers.