MUMBAI: “All over the world, the future is uncertain. In India, even the past is uncertain.” The comment by former Reserve Bank of India (RBI) Governor Y.V Reddy is more relevant today than before. Markets are bracing for sharp revisions to gross domestic product (GDP) data for the current budget after India’s main statistical office said on Monday that the country’s economy shrank from a record 23.9% in the past. during the June quarter.
Nomura Financial Advisory and Securities (India) Pvt Ltd now expects a 10.8% contraction for FY21, while Kotak Institutional Equities expects a deeper contraction of 11.5%. The research arm of the country’s largest lender, the State Bank of India (SBI), expects a 10.9% contraction this year.
Here are five reasons behind such expectations:
The missing informal piece
The main flaw in Q1 GDP is that it does not take into account data from the informal sector. The June quarter printout was gleaned from listed companies in the formal sector, which was then used to make assumptions about the rest of the economy. The space listed is only a fraction of what the economy understands in terms of business.
Subsequent revisions to annual GDP data will help capture this better. “Informal manufacturing is usually incorporated by taking IIP as a proxy. However, with the pandemic and reverse migration, the impact of the informal sector can only be known by a full investigation. Thus, the full impact of COVID- 19 in the first trimester is not fully known “. Soumya Kanti Ghosh, chief economist at the State Bank of India said in a note.
The lockdown to curb covid-19 has caused the most suffering in the informal sector. Anecdotal evidence of the closing of several small businesses reflects this pain.
The government connection
Economists pointed to the anomaly in the sharp 10% contraction in public administration but 16.2% growth in final government consumption expenditure. One reason, according to the SBI, could be that the public administration of education, social services and others was stalled for much of the June quarter. While the increase in public spending should provide some relief, the sustainability of this is questioned by economists. Hindered by a sharp decline in tax revenues, the chances of the government providing support are now less.
Hard blow on demand
The basis of India’s economic history, consumer demand, is no longer a supporting factor. High-frequency indicators of employment, wages and discretionary spending show an uneven recovery at best. In fact, the deceleration in wages has been pointed out as a big drag on growth, according to analysts at HSBC. In addition, political support for the government’s request should be limited.
“We also expect a second round of targeted tax support in the coming months, although it is still unclear whether the government will provide a full-scale demand boost,” Nomura analysts wrote in a note.
The investment grave
Dying investment is perhaps the worst blow to an economy’s potential growth. While the collapse in investment in the June quarter reflected in the 47% contraction in gross capital formation is not surprising, the decline in public investment is.
HSBC expects India’s growth potential to fall to 5% after the pandemic, from 6% previously. The ailing banking sector would also contribute a lot. Even though the government’s initial stimulus package relied heavily on credit, the banks did not lend and did not lend freely. Risk aversion caused bank lending to contract 1.5% in the first four months of this fiscal year. This also indicates a drying up of investments in the coming quarters. Indian companies shy away from making investment plans when the outlook is blurry.
Not a drop to lend
Indian policymakers depend on the country’s lenders to revitalize the economy. But the first signs of this are appalling. Bank lending has declined 1.5% in the first four months of FY21 and banks are reluctant to lend citing weak corporate balance sheets. In addition, lenders are now expected to restructure loans after the moratorium is concluded. Restructuring would mean granting another moratorium on repayments, extending the loan term or even cutting your hair. As traditional banks grapple with a toxic loan stack and low levels of capital, non-bank lenders grapple with funding challenges. Beyond the big names, non-bank financial companies are still not able to easily access financing.