Hold on, for the long haul: Economic Times 21st Feb 2020

There is considerable ambivalence on the real state of the economy today. While green shoots — signs of economic recovery — have been spotted by some economists, such sights have turned out to be, more often than not, mirages. At times, a positive growth number in the index of industrial production (IIP) is interpreted as the ‘start of a turnaround’, which may not be the case. The high purchasing managers’ index (PMI) in manufacturing registered in January 2020 has added to this sentiment.

These ‘sightings’ were visible in FY2019, too. But they did not quite turn out the way expected.It is now clear that growth in FY2020 will not be more than 5% of GDP. Now, if green shoots are seen, and have to fructify, the result, based on existing official estimates, may not be very strong. Growth estimates in the budget as well as Economic Survey point to 6-6.5% in FY2021, which is also the view of the Reserve Bank of India (RBI). The International Monetary Fund (IMF) and World Bank also aver that this can be lower at 5.8%. But one can assume that there will be movement by one percentage point this year.

However, a significant pointer in the budget, which may have missed our attention, is that the fiscal deficit would be 3.5% in FY2021 and 3.8% in FY2020, against 3.3% targeted at the beginning of the year. But it was stated clearly that the fiscal deficit for both the years would still be within the Fiscal Responsibility and Budget Management (FRBM) Act framework —and, more significantly, the exerciseleveraged the escape clause of extra 0.5% deficit when the economy was going through extreme conditions.

This means that the economy was on adecline in FY2020 and will also be in a similar state in FY2021, notwithstanding the higher growth rate.

In fact, FRBM talks of extreme conditions of drought or natural calamity or political-related issues for invoking such a clause. But as these situations do not prevail, the economy is downbeat, which has evoked this clause. In fact, the FRBM talks of growth being 3% lower than the average of the last four quarters may not hold for FY2021, as overall growth is expected to be higher than FY2020. So, caution may need to be exercised when interpreting these green shoots.

Statistically, growth in FY2021 would be better than FY2020 due to the base effect, which is more of a numerical explanation, as growth across sectors would be reckoned on lower base numbers of FY2020. But, prima facie, it does not look like that significant acceleration is expected in FY2021.

At the start of any year, one could assume that there would be a normal monsoon. This is a necessary condition for rural demand to revive during harvest time, which coincides with the festival and marriage season starting end-September and moves through till January. But this theory has faltered, as a good monsoon and high supplies may not mean good income for farmers, who have been battling declining prices with ineffective support from the minimum support price (MSP) scheme, which is selectively active for rice and wheat alone.

Here, the Economic Survey has also spoken of growth picking up in the second half, which means that the first half won’t be too exciting. This is reiterated by the RBI forecast, which looks at a higher growth rate of 6.2% in Q3 and 5.5-6% in H1. Therefore, there will also be tepid growth during the first half of the year.

While official indications are that the growth path will be gradual, there are some interesting takeaways from RBI’s Financial Stability Report.

In its projections on non-performing assets (NPAs), the view is that the baseline scenario looks at gross NPAs increasing from 9.3% in September 2019 to 9.9% in September 2020. This has been ascribed to both the macroeconomic situation, as well as to lower growth in the denominator effects.

This is comforting in a way, as it means that the asset recognition conundrum is now behind us. But macro effects would again indicate some pressure building on account of a less-than-robust economy. This, however, doesn’t take into account the restructuring of small and medium enterprises (SME) loans entering this bucket.

While growth in FY2021 may be expected to be better than in FY2020, it may lack the zing required to reflect any kind of acceleration. A gradual upward path looks reasonable, though the risk factors, especially on the demand side, will still hold the clue. GoI has shown character by not going beyond the FRBM perimeter, which has already been extended by using the escape clause. FY2021 will, hence, be more a period of consolidation than of acceleration.