Tuesday, 21 February 2017

Will Demand and Credit respond in the next Fiscal?

As per the Macro-Economic Framework Statement, {Budget Documents} : Indications are that global economic growth is gradually picking up. This  augers well for Indian exports which are highly responsive to the dynamics of global economic activity. On the other hand, the increasing global prices of oil and other key commodities may exercise an upward pressure on the value of imports. Domestic demand is expected to get a boost from accommodative monetary policy and the unleashing of domestic trade and consumption as the economy gets remonetised to the required levels.

The performance of the industrial sectors based on the Index of Industrial Production (IIP) comprising mining, manufacturing and electricity reveals a modest growth of 0.4 per cent during April-November 2016-17 as compared to 3.8 per cent during the same period of 2015-16. As per the sectoral classification, the production of manufacturing sector declined by 0.3 per cent during April-November 2016-17. The electricity and mining sectors registered growth rates of 5.0 per cent and 0.3 per cent respectively during April-November 2016-17. It is noteworthy that the manufacturing sector declined

Inflation does not seem problematic as of now; while the Banking Sector is showing some signs of stress due to rising NPAs; Agricultural Credit seems to be on the target taken; As per the First Advanced Estimates released by the Central Statistics Office, the economy is estimated to grow at 7.1 per cent in 2016-17, as compared to the growth of 7.6 per cent achieved in 2015-16. The growth in agriculture, industry and services is estimated at 4.1 per cent, 5.2 per cent and 8.8 per cent in 2016-17 as opposed to 1.2 per cent, 7.4 per cent and 8.9 per cent respectively in 2015-16. Growth rate of industry sector declined in 2016-17 in part due to moderation of growth in manufacturing sector. It is noteworthy  Manufacturing, as seen above, is lackluster.

Finally, our external debt seems reasonably healthy with a predominance of long-term debt; and FER is great at 360 Billion USD, giving over 12 months of Import cover. Exports remain a significant challenge riding on global concerns primarily; From the above points, it can be seen that the major challenge is boosting confidence and investments in manufacturing. The growth in fixed investment at constant prices declined from 3.9 per cent in 2015-16 to (-) 0.2 per cent in 2016-17

The expectations of an improvement in demand and consumption internally is based on a successful remonetisation, and budgetary steps in Agriculture, Transport, Telecom, increased Agricultural Credit as well as a focus on the Poor and the Farmers. Added to this is the budgetary focus on rural housing, which is a known and well-studied demand impetus, as can be seen from Turkey Singapore examples. From this, it is clear that there is a decided positive impetus towards consumption recovery.

However, we need to understand the macro-economic scenario given above for a realistic assessment; the fact is that industrial credit has been relatively flat or has seen slow growth for a few months now. Economic growth is dependent on Credit Offtake, which was initially slow in the runup to demonetization. There were structural issues as well, in that a large percentage of the exposure in PSBs was to large corporates. Now this is clearly both a problem and an opportunity, as the increased focus on SMEs means that the banks have space to increase credit to this sector.

{Source of image : Point 3 in Bibliography

From the above, we can see that there is a positive impetus to growth. The remonetisation has happened as assumed in the Budget; housing, SME and Agriculture take primacy in policy for the current fiscal. The Indian Economy is also largely a SME-Agricutural Economy. But we need to keep in mind the connectivity of SME to corporates {vendors, mfgs, spares etc}, the time lag required for growth to kick in, the fact of the leverage of banks {PSBs} to corporates, {A November Livemint report states the problem arises from slower revenue & higher interest}

Source of Graph - created by self from Data; as per this, India is the 2nd lowest in a list of 18 emerging market countries mentioned in the IMF report. Key countries reproduced above.

Furthermore, you have to add to this the reality of GST kicking in from Mid-Q2 or Q3 17-28. What the impact of GST will be is currently open to conjecture in my opinion; we can only wait. From the above pluses and minuses, I can reach a conclusion that while there is stimulus to growth & the conditions are right, demand side improvement may take a little time to come about. Slower Credit, Debt issues, IIP and Manufacturing all indicate a revenue-side challenge. While the steps taken are certain to bring about an improvement, will this come about in Q1-Q2 17-18, or is delayed remains to be seen. Let us all be positive; we also now have excellent liquidity and  lower cost of funds  due to Demonetisation. If credit growth responds, then we might just see a stunning turnaround…

References and Bibliography :

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