JUNE UPDATEQuarterly Review of the Economy, 2020-21:Q1
in Coronavirus times
Sudipto Mundle, Bornali Bhandari, N R Bhanumurthywith Shankar Acharya and Pronab Sen
in conversation withShekhar Shah
Webinar, Thursday, June 25, 2020, 6:30 pm IST
Coronavirus Briefing
Atul
Loke
/The
New
Yor
k Ti
mes
2
QRE Team
Team Members
Sudipto Mundle, Bornali Bhandari, NR Bhanumurthy (NIPFP), Anil K Sharma, Pallavi Choudhuri, Rudrani Bhattacharya (NIPFP), Saurabh Bandyopadhyay, Prerna Prabhakar, Sanjib Pohit, Poonam Munjal, Devender Pratap and Ajaya K Sahu
Organisational SupportSudesh Bala, Praveen Sachdeva, Anupma Mehta, Shilpi Tripathi, Khushvinder Kaur and Sangita Chaudhary
3
Coronavirus Pandemic Growth of Daily COVID-19 deaths
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0
10
20
30
40
50
60
70
80
Num
ber
of d
eath
s
% c
hang
e
Number of COVID-19 Deaths, Growth of Daily COVID-19 Deaths and 7-Day Moving Average of the Daily Growth Rate, 10 March 2020 to 23 June 2020
Daily Growth Rate in COVID-19 Deaths 7-day Moving Average of COVID-19 Daily Death Rate COVID-19 Deaths
Lock down25th March, 2020
3Source: MoHFW.
4
Outline
I. Stimulus Policy Simulations
II. Performance of the Real Economy and TradeA. Real Sector TrendsB. Business SentimentsC. Price Trends
III.Macroeconomic PoliciesA. Fiscal OutlookB. Monetary Policy Challenges
5
Policy Simulations -I
Assumptions about Disruptions in GVA and Key Sectors (%y-o-y)
Sector 2019-20:Q4*
2020-21:Q1
2020-21:Q2
2020-21:Q3
2020-21:Q4
2019-20*
2020-21
Agriculture 5.9 3.0 3.0 3.0 3.0 4.0 3.0
Industry (-)0.6 (-)54.2 (-)36.0 (-)18.0 0 0.9 (-)27.1
Services 4.4 (-)16.3 (-)10.9 (-)5.4 0 5.6 (-)8.2
GVA 3.1 (-)25.7 (-)16.7 (-)8.1 0.5 3.9 (-)12.4
3.1
-25.7-16.7
-8.1
0.5
-30.0-25.0-20.0-15.0-10.0-5.00.05.0
05
10152025303540
Q4 Q1 Q2 Q3 Q4
2019-20 2020-21 GV
A a
t Bas
ic P
rice
s (%
y-o-
y)
GV
A a
t Bas
ic P
rice
s (R
s la
kh
cror
e)
Expected Real GDP in 2020-21(minus fiscal stimulus)
GVA at Basic Prices (%y-o-y) GVA at Basic Price
6
Policy Simulations -II
•Initial assumption is that negative growth is assumed to continue till Q3, then recover modestly to 0.5% in Q4
•For the whole year 2020-21 GDP growth is assumed to be (-)12.4%
•This assumes no policy stimulus (either monetary or fiscal)
•What would be the impact of monetary and fiscal policies (including Atmanirbhar Bharat Package) that have been initiated?
•A policy simulation model has been used to assess the impact.
•Simulations used to assess the overall impact with no supply constraints (base case), followed by scenarios with varying degrees of supply constraint.
7
Scenarios GDP growth(%)
Inflation (%)
Fiscal Deficit (as % of GDP)
CAD(as % of GDP)
Base case 1.33 5.46 7.6 2.8
Scenario-1 0 6.03 7.8 2.6
Scenario-2 (-)2.0 6.44 7.8 2.3
Scenario-3 (-)5.0 6.71 7.6 1.8
Scenario-4 (-)10.0 7.78 7.4 1.1
Some Simulation Results - IFive scenarios are: • Base Case: Incorporates monetary and fiscal stimulus measures (includes post-Budget
additional government borrowing of Rs 4.2 trillion as well as additional States’ borrowing of up to 2% of GSDP)
• Scenarios 1 to 4: Introduce supply constraint by fixing the GVA growth exogenously at 0 per cent, (-) 2 per cent, (-) 5 per cent and (-) 10 per cent.
8
Some Simulation Results - II
• If fiscal & monetary policies are fully implemented without supply constraints, GDP growth could amount to 1.3% in 2020-21
• Economy at present is subject to severe supply constraints due to increased mortality of businesses (MSMEs), reverse migration and large scale disruption of supply chains.
• The five scenarios taken together suggest inflation would vary between 6 and 8%, combined fiscal deficit would be contained at under 8% and current account deficit would vary between 1% and 3% of GDP.
• Stronger the supply constraint higher would be the inflation rate. It is likely to go above the RBI’s tolerance band. This is the most plausible outcome given the prevailing supply constraints.
9
Sustained decline in GDP Growth since Q3: 2017-18 before coronavirus crisis
8.3
4.2
8.7
3.1
0.0
2.0
4.0
6.0
8.0
10.0%
cha
nge
Real GDP Growth
Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO
Legend: _ Annual; _ Quarterly.Source: MoSPI and NCAER Estimates.
10
Coronoavirus Shock assessmentTable 1: Assumptions of Sector Disruptions in Q1 2020-21 GVA
Sector Sector
Assumptions of Disruptions in
2020-21:Q1 on a y-o-y basis (%)
GVA in 2019-20:Q1(Rs crore)
GVA in2020-21:Q1(Rs crore)
Agriculture Agriculture, forestry and fishing 3 4,39,843 4,53,038.3
Industry
Total (-)54.3 10,16,199 4,64,807.8
Mining and quarrying 0 92,807 92,807
Manufacturing (-)62.4 5,78,936 2,17,892.8
Electricity, gas, water supply & other utility services -40 81,628 48,976.8
Construction -60 2,62,828 1,05,131.2
Services
Total (-)16.3 18,51,665 1,554,136
Trade, hotels, transport, communication and services related to broadcasting (-)62.4 6,30,860 2,37,518.8
Financial, real estate & professional services 6.7 8,03,322 8,57,385.6
Public administration, defence and other services 10 4,17,483 4,59,231.3
Total GVA TOTAL GVA at basic prices (-)25.7 3,307,707 24,71,982
Source: NCAER QRE Team.
11
Forecast of normal South-west monsoon augurs well for Indian agriculture
7.0
14.0
8.07.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Large Excess Excess Normal Deficient
No
of s
ubdi
visi
ons
Sub-division wise Rainfall Distribution (June 1, 2020 to 22 June, 2020)
Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO
Source: IMD
12
Steep Decline in Industrial Growth since Q4: 2017-18
9.6
0.9
4.2
-0.6-2.0
0.0
2.0
4.0
6.0
8.0
10.0%
cha
nge
Growth in Industry GVA
• Estimated decline of (-)54.2% in Q1: 2020-21Legend: Annual; Quarterly.Source: MoSPI and NCAER Estimates.
IIP confirms continuing industrial slowdown
3.2 4.9
-6.6
4.6
-55.5
2.5 4.8-5.7
3.1
-64.3-70.0-60.0-50.0-40.0-30.0-20.0-10.0
0.0
% y
-o-y
cha
nge
IIP General and IIP Manufacturing (%y-o-y)
IIP General IIP Manufacturing
Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO
Source: MoSPI
14
Sharp decline in services growth projected for 2020-21
9.45.5
-8.2
8.7
-16.3-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
% c
hang
e
Growth in GVA Services
Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO
Legend: Annual; Quarterly and Projections.Source: MoSPI and NCAER Estimates
15
Cargo and passenger traffic have declined sharply
Revenue Earning Goods Traffic and Cargo Handled at Major Ports
-35.3
-21.2
-21.0
-23.3
-40.0-35.0-30.0-25.0-20.0-15.0-10.0
-5.00.05.0
10.0
2019
: Apr
ilM
ayJu
neJu
lyA
ugus
tSe
ptem
ber
Oct
ober
Nov
embe
rD
ecem
ber
2020
: Jan
uary
Febr
uary
Mar
chA
pril
May
% y
-o-y
cha
nge
Revenue Earning Goods Traffic (%yoy)
Cargo Handled at Major Ports (%yoy)
Air Passenger and Cargo Traffic
-99.8
-82.8
-100.00-90.00-80.00-70.00-60.00-50.00-40.00-30.00-20.00-10.00
0.0010.00
2019
: Apr
ilM
ayJu
neJu
lyA
ugus
tSe
ptem
ber
Oct
ober
Nov
embe
rD
ecem
ber
2020
: Jan
uary
Febr
uary
Mar
chA
pril
% y
-o-y
cha
nge
Total Air Passenger Traffic (%yoy)
Total Air Cargo Traffic (%yoy)
Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO
Source: CMIE and Airports Authority of India.
16
Exports and imports growth declining since Q2: 2018-19, now negative
1.57.9
-2.34.9 0.1 -1.5 1.4 2.9 3.4 1.8 4.4
-21.9
-39.3-28.5
4.5 7.7-4.7 -4.8 -8.0 -9.1 -11.9 -7.7 -4.8
1.2 4.7
-23.3
-50.0-46.8-60.0-50.0-40.0-30.0-20.0-10.0
0.010.020.0
% c
hang
e
Growth of Exports and Imports of Goods & Services (US$ terms, %y-o-y)
Exports of Goods & Services Imports of Goods and Services
Source: Ministry of Commerce and RBI.
17
Nikkei PMI indicate continued contraction in April and May 2020
27.430.8
5.412.6
010203040506070
PMI
Indices April 2018 to May 2020
PMI Manufacturing PMI ServicesNote: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO
Source: Nikkei PMI
18
Inflation trends
3.0 7.6 5.8
0.4
14.7
8.8
12.0
8.5
-2.00.02.04.06.08.0
10.012.014.016.0
% y
-o-y
cha
nge
CPI and CPI Food Inflation (excluding meat & fish)
CPI CPI Food Inflation
Source: MoSPI and Office of Economic Advisor
19
Decomposition of the Atmanirbhar Bharat (AB) Stimulus Package
Item Amount(Rs trillion)
GDP (%) Remarks
Total (Stimulus component only)
18.7 9.3AB includes reforms, etc. + fiscal & monetary/credit components, only latter included here as stimulus
RBI liquidity injection 8.0 4.0 Undertaken prior to 13 May, 2020.Mainly adding to M3
AB credit guaranteemeasures 8.1 4.1
Implementation contingent on financial institutional decisions.Will add to M3
Fiscal component 2.6 1.3 Will add to fiscal deficit
Contingent Liability 0.9 0.5 No stimulus impact.Not included in Rs 18.7 trillion.
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Fiscal Stimulus Budget plus Post-Budget
• The 11.7% of GDP total excludes extra budgetary resources such as 0.9% of GDP in the Central budget and any State Government off-budget borrowing. So total Public Sector Borrowing Requirement could be around 13% or more.
• This is a very strong fiscal stimulus, coming together with RBI liquidity injection plus additional credit guarantees (especially for MSMEs) adding up to over 8% of GDP on the monetary side
• Impact of such strong demand stimulation will depend on strength of supply response
Item GDP (%)Central Government Budget Deficit 3.5
Post-Budget additional borrowing 2.1
AB fiscal component 1.3
States’ Budget 2.8
Additional borrowing headroom for states 2.0
Total 11.7
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Scenarios GDP growth(%)
Inflation (%)
Fiscal Deficit (as % of GDP)
CAD(as % of
GDP)Counterfactual
Scenario (-) 12.4 4.5 6.4 1.4
Base case 1.3 5.5 7.6 2.8
Scenario-1 0 6.03 7.8 2.6
Scenario-2 (-)2.0 6.44 7.8 2.3
Scenario-3 (-)5.0 6.71 7.6 1.8
Scenario-4 (-)10.0 7.78 7.4 1.1
Impact of Fiscal & Monetary Stimulus
Main takeaways from these scenarios:
• The stimulus measures can drive a strong recovery in the absence of supply constraints. However, strong supply constraints are likely to be binding.
• Inflation, fiscal deficit and current account deficit may be somewhat elevated in some scenarios but not alarming
• A sudden acceleration in portfolio capital flight could be de-stabilising. This risk is not factored into the simulations.
22Source: RBI
5.15
4
33.5
44.5
55.5
66.5
77.5
8%
Rates and Yields, % (January to May 2020)
Policy Repo Rate Reverse Repo Rate91-Day Treasury Bill (Primary) Yield 364-Day Treasury Bill (Primary) Yield10-Year G-Sec Par Yield (FBIL)
Weak Transmission
22
23
Non-food credit growth has declined sharply since Q3: 2018-19
6.37.1
12.5
10.0
12.512.2
13.713.0
12.0
8.7
6.4 6.1
5.0
10.0
15.0
Non
-foo
d C
redi
t (%
y-o-
y)Non-food Credit
Source: RBI
24
Credit growth has declined further in 2020
24
7.8 7.21.5
3.98.3
16.1 15.910.0
3.9 1.7
-2.2-6.4
2.7
11.2 12.1
3.0
-10.00-5.000.005.00
10.0015.0020.00
Growth Rate of Bank Credit by Sectors (%, y-o-y)
26-04-19 24-04-20
Source: RBI
25
Rising Risk Aversion and Stalled Bank lending
• Rising risk aversion against lending to NBFCs due to scams like IL&FS & coronavirus crisis─ Targeted Long Term Repo Operations (TLTRO 2) of ₹25,000 crore, intended for directing credit to
NBFCs remained only half subscribed.─ But NBFCs are the main source of credit for MSMEs.
• Similar rising risk aversion in lending to MSMEs.
• Such risk aversion likely to increase under Covid-19 crisis ─ MSME borrowers also averse to borrowing under present conditions ─ Credit flow to MSMEs has virtually dried up─ Need credit guarantees or partial credit risk guarantees
• Atmanirbhar Bharat package (13 May 2020) include these provisions ─ Government credit guarantee for MSMEs─ RBI Partial credit guarantee for NBFCs.
26
Challenge of Massive Government Borrowing
• Total government borrowing programme of well over ₹ 17 trillion ( 8.8-10.8% of GDP).
─ Announced Central government borrowing programme of 6% of GDP, including ₹1.3 trillion additional borrowing to finance fiscal component of AB package.
─ This also includes State government borrowing of up to 4.8% of GDP, including recently provided additional headroom of 2% of GDP.
• Government borrowing on such a scale unprecedented in India, not clear if financial system can cope
• Multiple channels need to be used to face this massive demand for sovereign loans
─ Market borrowing with part indirect monetisation in secondary market by RBI.─ Further liberalisation of ‘Ways and Means' advances, subsequently converting them to dated securities.─ Direct monetisation of residual deficit by RBI, lender of last resort, through private placements
• Finally, it may be necessary to spread this borrowing over two years, 2020-21 & 2021-22 in order to maintain financial stability while reviving the economy.
Thank You!