Indian growth data continue to point to deep growth slump. Real GDP growth declined to 26-qtr low of 4.5%, while nominal GDP fell to 6.3%, lowest since June 2009. GVA also slowed to 4.3% and nominal GVA to 6.3% (lowest since March 2003). Growth number would have been much lower but for the strong support from government spending as reflected in the strong growth in public administration defence services and Government Final Consumption Expenditure (GFCE). GVA growth ex-PADS stood at dismal 3.2%.
Besides the low real GDP, another concern is that 1H nominal GDP growth declined to 7% y-y, which is showing on gross tax collections growing at only 1.2% y-y and tax collections contracting in each of the last three months. Besides the impact on tax collections, headline fiscal deficit would automatically rise by 12bp as a percent of GDP if we assume nominal GDP for full year growing at 8%. We concur with RBI’s growth forecast of 5% y-y for FY20 GDP.
Monthly high frequency indicators also reflected continued growth slump, with IIP for September coming very weak at lowest level in the current series. All three segments – Mining, manufacturing, electricity – contracted. Weakness was broad-based and except for intermediate groups all the sub-segments presented negative growth. Electricity generation declining by 13% y-y is stark pointer to extent of slowdown. However, PMI data for November showed some uptick.
Transport data remained weak with freight data, airport traffic, diesel consumption showing de-growth. Petrol consumption however remained strong. Retail auto sales data showed some recovery in festive season, but the commentary was not encouraging suggesting a short pop-up due to high discounts. Wholesale auto sales data for October also remained disappointing.
New financing remained weak, with our new financing index which tracks new financing raised via banks, bond market, equity markets and FDI declining to the lowest since demonetisation period. Bank non-food credit declining to lowest since October 2017. Ytd credit growth continues to significantly lag growth both in FY19 as well as the FY14-FY19 average even as other source of financing remains weak. Overall credit (Banks + CPs+ NCDs) as on September declined sharply to 7.6%, lowest since data is available.
Moreover, fiscal math of Government of India is under stress with tax collection faltering significantly compared to budget run-rate. Moreover, 2QFY20 GDP would have been even worse off but for the heavy lifting by government expenditure. Hence major expenditure cuts like we saw in last few years to meet fiscal targets looks less likely although government may still look to shift some of the expenditure off-balance sheet and utilize the small savings scheme collections to fund part of the likely fiscal slippage.
Foreign trade data was also disappointing reflecting weakness in domestic demand with imports decreasing by 16% y-y and Non-Oil Non-Gold (NONG) imports by 10% y-y. Exports growth was also negative at -1.1%. Trade deficit remained benign at US$ 11bn. Capital flows remain strong and RBI has been continuously accumulating reserves. If crude remains at these levels, we expect BoP surplus to be above US$ 30bn for the fiscal. BoP surplus and RBI intervention is keeping INR rangebound despite growing concern about economic growth.
Headline CPI inflation in October picked up further to the highest level since June 2018 and RBI’s target at 4.6% YoY versus 4% YoY in the previous month. The two key trend visible in inflation are 1) Sharp rise in food inflation along with further weakening in core inflation, 2) Narrowing gap between rural and urban inflation with rural inflation catching up towards urban inflation level. We expect uptick in food inflation to sustain for some more time. While there will be some upside pressure on core inflation given the hike in telecom rates, muted demand should keep core inflation contained. RBI has forecasted inflation at 4.7 to 5.1% range in 2H and we broadly concur with RBI.
RBI Monetary Policy
In a surprise move, RBI kept policy rates unchanged after having cut consecutively since February 2019. Importantly, all six members voted for a pause in contrast to both market expectations and previous three meetings, where all the members had voted for cut. However, MPC kept alive hopes for further cuts, recognizing monetary policy space for future action and continue with accommodative stance as long as it is necessary to revive growth but while ensuring that inflation remains below target. In a situation when growth slowdown looks more entrenched and underlying core inflation has slumped to sub-3.5% amid widening output gap, it would be premature to call it the end of rate easing cycle. However, we see low chance of easing in the February policy given our expectation of higher inflation in December (last reading before next policy) and possibility of fiscal slippage in the Union Budget. Latest RBI policy has been surprising for market participants and observers alike. The emphatic 6-0 vote for status quo despite the sharp growth slowdown suggest consensus in the MPC regarding the primacy of headline inflation as its mandate.
CAD: Current account deficit; BoP: Balance of Payment; NBFC: non-banking finance companies
Source: CEIC, Bloomberg, RBI
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