Prolonged consumption slowdown delaying recovery: economists

India’s prolonged consumption slowdown and a deteriorating global environment are delaying a recovery in Asia’s third-largest economy, nudging its government into action to supplement the central banks monetary stimulus.

       In a spate of announcements within a week, the government eased foreign investment rules, gave concessions on vehicle purchases and encouraged banks to make loans cheaper to spur growth from a five-year low. It also secured more fiscal space to stimulate the economy with a windfall from the central bank in excess of $24 billion.

       While the slowdown last quarter reflects, for the most part, a slump in investment before the election, high-frequency indicators since then suggest the economy’s lack of momentum has persisted.

       Finance Minister Nirmala Sitharaman is still considering whether to use the windfall from the central bank to cut borrowings or boost spending. The other measures announced so far, like the easing of foreign investment rules, will also do little to boost consumer demand in the near term.

       Since the major contributors to the economy’s investment pie are households and private corporations, their spending hold the key for reviving broad-based investment activity in the economy, said Sunil Kumar Sinha, principal economist at India Ratings and Research.

       Prime Minister Narendra Modi, who returned to power in May with a bigger margin than in 2014, is witnessing the worst slowdown so far under his watch. Unemployment is at a 45-year high, car sales have slumped the most in almost two decades in July and infrastructure output grew at the slowest pace in more than four years.

       “We recognise that consumption will have to be given a boost,” Sitharaman said on Thursday, adding that the government will unveil more measures that address demands from businesses.

       The Reserve Bank of India has already cut interest rates by 110 basis points this year to the lowest in nine years to boost loans and revive investment, while signalling its ready to do more. It has been pumping in liquidity to tide over a cash crunch in the banking sector.

What economists Say

       India’s slowdown is taking longer than anticipated to turn around, with the slump likely extending into the April-June quarter. The reasons — a slow roll-out of a fiscal support package for farmers, and weak transmission of the Reserve Banks rate cuts, said economist Abhishek Gupta.

       The government added to that with a decision to immediately inject ₹70,000 crore to recapitalise state-run banks and encourage them to lend. The moves were initially cheered by the market, but those gains faded by Thursday as concerns on the slowing local economy and trade talks between the US and China dominated investor sentiment.

       “The government has done only some tweaks to existing policies, but nothing that’s really big-bang,” said NR Bhanumurthy, an economist at New Delhi-based National Institute of Public Finance and Policy. “Markets seem to be awaiting more measures. The government should’nt keep them in waiting.”

       In the absence of any substantial fiscal stimulus, some economists feel the RBI may have to do more heavy lifting to support growth. Prakash Sakpal, an economist at ING Groep NV in Singapore, expects the central bank to cut the key rate by another 50 basis points before the end of this year.

       Despite all easing this year, there are no improvements in the monetary indicators, he said. The RBI is under pressure from the government for more interest rate and liquidity support for the economy and it will continue cutting policy rates.

Thanks to Bloonberg - The Hindu Business Line

Agri GDP growth falls: Doubling farmers’ income in next 3 years looks a tough task

While production has dropped, it has not been accompanied by a commensurate increase in price.

       Last week, while the CSO released the Q1 GDP numbers, it also showed numbers for agriculture, forestry and fishing as a segment. For the June quarter, this segment’s growth in real terms was 2 per cent, against 5.1 per cent in the same quarter of the previous year.

       Agri GDP growth has been sliding since the beginning of 2018-19. Against the 5 per cent growth reported in 2017-18, the year 2018-19 ended with a growth of 2.75 per cent.

       Though broad numbers from the Ministry of Agriculture show that the country has been doing well on crop output, dissecting it reveals that there has been a drop in production in some major food as well as non-food crops.

       Among non-food crops, take groundnut, for instance. The crop’s output for 2018-19 is estimated at 66.95 lakh tonnes against 92.53 lakh tonnes in 2017-18. Similarly, castor seed production last year was estimated at 12.15 lakh tonnes, down from 15.68 lakh tonnes in 2017-18. In the case of cotton, production has dropped, from 328 lakh bales in 2017-18 to 287 lakh bales in 2018-19.

       In the foodgrains basket, pulses, maize, bajra, ragi and all nutri cereals have seen a production drop in 2018-19.

       Until 2017-18, foodgrain production was growing robustly. If we break the last 10 years as UPA and NDA years, between 2009-10 and 2013-14, foodgrain output recorded an annualised growth of 5 per cent. This, however, reduced to 3 per cent in the NDA years between 2014-15 and 2018-19.

       While the new irrigation projects helped, monsoon failure in four of the five years (between 2014-15 and 2018-19 – two deficient and two below normal monsoon rains) had their impact on crop output.

       The slump in crop output has been slow in reflecting in price because of weak demand and in some cases because of excess inventory from previous years being available in the market, like in the case of pulses. However, prices have started moving up of late. This is what explains food inflation ticking up in the last few months and the nominal agri GDP growth at 7.9 per cent for the April-June 2019 quarter versus 6.8 per cent in the same period of the previous year.

       Weakness in domestic demand aside, demand from export orders for certain agri products was also poor, which kept prices muted. In the April-June 2019 quarter, India’s agri commodity exports were Rs 60,614 crore, down five per cent from the previous year. Export of rice, coffee and tea have been lower than last year.

Farmers’ income

       In the coming quarters, for agri GDP growth to revive, the sub-sectors in agriculture – forestry, livestock and fishing – need to show some strength.

       Otherwise, the task of doubling farmers’ income, for which just three years are left, looks difficult. The income support scheme alone can’t help.

       The higher MSPs announced haven’t really had an impact, except on paddy, wheat and some pulse crops. eNAM – the electronic National Agriculture Market scheme, which was expected to bring more buyers for a farmer’s produce, is still in a preliminary stage.

Thanks to Raj Laxmi Nirmal - The Hindu Business Line

Surplus effect: RBI may have to suck out excess liquidity

The Reserve Bank of India may need to sterilize the liquidity that will eventually find its way into the financial system once the government starts spending the staggering Rs. 1,76,051 crore surplus which was approved to be transferred by its central board last week.

In its capacity as the government’s banker and debt manager, the RBI may have to manage the surplus liquidity to stanch its possible inflationary effect.

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In this regard, the RBI may resort to open market operation (O.M.O.) sales (of government securities) to suck liquidity out of the financial system, otherwise it could have implications on the inflation front, say market experts.

O.M.O. sales could be over and above the routine Reverse Repo auctions that the RBI conducts under its liquidity adjustment facility.

Under the Reverse Repo auction, banks deploy their surplus liquidity with the RBI. As part of this transaction, banks purchase securities from the RBI with an agreement to resell them to the latter on a mutually agreed future date at an agreed price which includes interest for the funds lent.

Under O.M.O., the RBI resorts to sale of securities to suck out the rupee liquidity. When the liquidity conditions are tight, RBI buy securities from the market, releasing liquidity.

Thanks to - K Ram Kumar  Mumbai