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JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1 in Coronavirus times Sudipto Mundle, Bornali Bhandari, N R Bhanumurthy with Shankar Acharya and Pronab Sen in conversation with Shekhar Shah Webinar, Thursday, June 25, 2020, 6:30 pm IST Coronavirus Briefing Atul Loke/The New York Times

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Page 1: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

JUNE UPDATEQuarterly Review of the Economy, 2020-21:Q1

in Coronavirus times

Sudipto Mundle, Bornali Bhandari, N R Bhanumurthywith Shankar Acharya and Pronab Sen

in conversation withShekhar Shah

Webinar, Thursday, June 25, 2020, 6:30 pm IST

Coronavirus Briefing

Atul

Loke

/The

New

Yor

k Ti

mes

Page 2: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

2

QRE Team

Team Members

Sudipto Mundle, Bornali Bhandari, NR Bhanumurthy (NIPFP), Anil K Sharma, Pallavi Choudhuri, Rudrani Bhattacharya (NIPFP), Saurabh Bandyopadhyay, Prerna Prabhakar, Sanjib Pohit, Poonam Munjal, Devender Pratap and Ajaya K Sahu

Organisational SupportSudesh Bala, Praveen Sachdeva, Anupma Mehta, Shilpi Tripathi, Khushvinder Kaur and Sangita Chaudhary

Page 3: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

3

Coronavirus Pandemic Growth of Daily COVID-19 deaths

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0

10

20

30

40

50

60

70

80

Num

ber

of d

eath

s

% c

hang

e

Number of COVID-19 Deaths, Growth of Daily COVID-19 Deaths and 7-Day Moving Average of the Daily Growth Rate, 10 March 2020 to 23 June 2020

Daily Growth Rate in COVID-19 Deaths 7-day Moving Average of COVID-19 Daily Death Rate COVID-19 Deaths

Lock down25th March, 2020

3Source: MoHFW.

Page 4: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

4

Outline

I. Stimulus Policy Simulations

II. Performance of the Real Economy and TradeA. Real Sector TrendsB. Business SentimentsC. Price Trends

III.Macroeconomic PoliciesA. Fiscal OutlookB. Monetary Policy Challenges

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5

Policy Simulations -I

Assumptions about Disruptions in GVA and Key Sectors (%y-o-y)

Sector 2019-20:Q4*

2020-21:Q1

2020-21:Q2

2020-21:Q3

2020-21:Q4

2019-20*

2020-21

Agriculture 5.9 3.0 3.0 3.0 3.0 4.0 3.0

Industry (-)0.6 (-)54.2 (-)36.0 (-)18.0 0 0.9 (-)27.1

Services 4.4 (-)16.3 (-)10.9 (-)5.4 0 5.6 (-)8.2

GVA 3.1 (-)25.7 (-)16.7 (-)8.1 0.5 3.9 (-)12.4

3.1

-25.7-16.7

-8.1

0.5

-30.0-25.0-20.0-15.0-10.0-5.00.05.0

05

10152025303540

Q4 Q1 Q2 Q3 Q4

2019-20 2020-21 GV

A a

t Bas

ic P

rice

s (%

y-o-

y)

GV

A a

t Bas

ic P

rice

s (R

s la

kh

cror

e)

Expected Real GDP in 2020-21(minus fiscal stimulus)

GVA at Basic Prices (%y-o-y) GVA at Basic Price

Page 6: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

6

Policy Simulations -II

•Initial assumption is that negative growth is assumed to continue till Q3, then recover modestly to 0.5% in Q4

•For the whole year 2020-21 GDP growth is assumed to be (-)12.4%

•This assumes no policy stimulus (either monetary or fiscal)

•What would be the impact of monetary and fiscal policies (including Atmanirbhar Bharat Package) that have been initiated?

•A policy simulation model has been used to assess the impact.

•Simulations used to assess the overall impact with no supply constraints (base case), followed by scenarios with varying degrees of supply constraint.

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7

Scenarios GDP growth(%)

Inflation (%)

Fiscal Deficit (as % of GDP)

CAD(as % of GDP)

Base case 1.33 5.46 7.6 2.8

Scenario-1 0 6.03 7.8 2.6

Scenario-2 (-)2.0 6.44 7.8 2.3

Scenario-3 (-)5.0 6.71 7.6 1.8

Scenario-4 (-)10.0 7.78 7.4 1.1

Some Simulation Results - IFive scenarios are: • Base Case: Incorporates monetary and fiscal stimulus measures (includes post-Budget

additional government borrowing of Rs 4.2 trillion as well as additional States’ borrowing of up to 2% of GSDP)

• Scenarios 1 to 4: Introduce supply constraint by fixing the GVA growth exogenously at 0 per cent, (-) 2 per cent, (-) 5 per cent and (-) 10 per cent.

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8

Some Simulation Results - II

• If fiscal & monetary policies are fully implemented without supply constraints, GDP growth could amount to 1.3% in 2020-21

• Economy at present is subject to severe supply constraints due to increased mortality of businesses (MSMEs), reverse migration and large scale disruption of supply chains.

• The five scenarios taken together suggest inflation would vary between 6 and 8%, combined fiscal deficit would be contained at under 8% and current account deficit would vary between 1% and 3% of GDP.

• Stronger the supply constraint higher would be the inflation rate. It is likely to go above the RBI’s tolerance band. This is the most plausible outcome given the prevailing supply constraints.

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9

Sustained decline in GDP Growth since Q3: 2017-18 before coronavirus crisis

8.3

4.2

8.7

3.1

0.0

2.0

4.0

6.0

8.0

10.0%

cha

nge

Real GDP Growth

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Legend: _ Annual; _ Quarterly.Source: MoSPI and NCAER Estimates.

Presenter
Presentation Notes
Assuming that GVA and GDP remain the same with fall in indirect taxes and increase in subsidies
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10

Coronoavirus Shock assessmentTable 1: Assumptions of Sector Disruptions in Q1 2020-21 GVA

Sector Sector

Assumptions of Disruptions in

2020-21:Q1 on a y-o-y basis (%)

GVA in 2019-20:Q1(Rs crore)

GVA in2020-21:Q1(Rs crore)

Agriculture Agriculture, forestry and fishing 3 4,39,843 4,53,038.3

Industry

Total (-)54.3 10,16,199 4,64,807.8

Mining and quarrying 0 92,807 92,807

Manufacturing (-)62.4 5,78,936 2,17,892.8

Electricity, gas, water supply & other utility services -40 81,628 48,976.8

Construction -60 2,62,828 1,05,131.2

Services

Total (-)16.3 18,51,665 1,554,136

Trade, hotels, transport, communication and services related to broadcasting (-)62.4 6,30,860 2,37,518.8

Financial, real estate & professional services 6.7 8,03,322 8,57,385.6

Public administration, defence and other services 10 4,17,483 4,59,231.3

Total GVA TOTAL GVA at basic prices (-)25.7 3,307,707 24,71,982

Source: NCAER QRE Team.

Presenter
Presentation Notes
Page 11: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

11

Forecast of normal South-west monsoon augurs well for Indian agriculture

7.0

14.0

8.07.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Large Excess Excess Normal Deficient

No

of s

ubdi

visi

ons

Sub-division wise Rainfall Distribution (June 1, 2020 to 22 June, 2020)

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: IMD

Presenter
Presentation Notes
India has received 25% excess rainfall compared to normal during the first 22 days of June. The level of water storage in the country’s main reservoirs on June 11, 2020 was 173 per cent of the live storage during the corresponding period of last year and 171 per cent of last 10-year’s average. The availability of main inputs such as seeds and fertilisers is reported to be comfortable for the upcoming season and overall intensity of pests and diseases has remained below the Economic Threshold Level (ETL). All these indicators have led the agricultural ministry to set high targets of growth for main crops. The target of foodgrains production for the year 2020-21 has been fixed at 298 million tonnes against an estimated output of about 295.7 million tonnes in 2019-20 . Though there are no firm estimates, expectations remain high for horticulture as well as dairy. Overall we are assuming agricultural growth of 3.0 per cent in 2020-21 as supply chain constraints have eased.
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12

Steep Decline in Industrial Growth since Q4: 2017-18

9.6

0.9

4.2

-0.6-2.0

0.0

2.0

4.0

6.0

8.0

10.0%

cha

nge

Growth in Industry GVA

• Estimated decline of (-)54.2% in Q1: 2020-21Legend: Annual; Quarterly.Source: MoSPI and NCAER Estimates.

Presenter
Presentation Notes
It is literally off the charts.
Page 13: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

IIP confirms continuing industrial slowdown

3.2 4.9

-6.6

4.6

-55.5

2.5 4.8-5.7

3.1

-64.3-70.0-60.0-50.0-40.0-30.0-20.0-10.0

0.0

% y

-o-y

cha

nge

IIP General and IIP Manufacturing (%y-o-y)

IIP General IIP Manufacturing

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: MoSPI

Presenter
Presentation Notes
Drop in demand has shown IIP Consumer durables and no-durables Drop in IIP Capital Goods
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14

Sharp decline in services growth projected for 2020-21

9.45.5

-8.2

8.7

-16.3-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

% c

hang

e

Growth in GVA Services

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Legend: Annual; Quarterly and Projections.Source: MoSPI and NCAER Estimates

Presenter
Presentation Notes
The quarterly four are estimated values.
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15

Cargo and passenger traffic have declined sharply

Revenue Earning Goods Traffic and Cargo Handled at Major Ports

-35.3

-21.2

-21.0

-23.3

-40.0-35.0-30.0-25.0-20.0-15.0-10.0

-5.00.05.0

10.0

2019

: Apr

ilM

ayJu

neJu

lyA

ugus

tSe

ptem

ber

Oct

ober

Nov

embe

rD

ecem

ber

2020

: Jan

uary

Febr

uary

Mar

chA

pril

May

% y

-o-y

cha

nge

Revenue Earning Goods Traffic (%yoy)

Cargo Handled at Major Ports (%yoy)

Air Passenger and Cargo Traffic

-99.8

-82.8

-100.00-90.00-80.00-70.00-60.00-50.00-40.00-30.00-20.00-10.00

0.0010.00

2019

: Apr

ilM

ayJu

neJu

lyA

ugus

tSe

ptem

ber

Oct

ober

Nov

embe

rD

ecem

ber

2020

: Jan

uary

Febr

uary

Mar

chA

pril

% y

-o-y

cha

nge

Total Air Passenger Traffic (%yoy)

Total Air Cargo Traffic (%yoy)

Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: CMIE and Airports Authority of India.

Presenter
Presentation Notes
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16

Exports and imports growth declining since Q2: 2018-19, now negative

1.57.9

-2.34.9 0.1 -1.5 1.4 2.9 3.4 1.8 4.4

-21.9

-39.3-28.5

4.5 7.7-4.7 -4.8 -8.0 -9.1 -11.9 -7.7 -4.8

1.2 4.7

-23.3

-50.0-46.8-60.0-50.0-40.0-30.0-20.0-10.0

0.010.020.0

% c

hang

e

Growth of Exports and Imports of Goods & Services (US$ terms, %y-o-y)

Exports of Goods & Services Imports of Goods and Services

Source: Ministry of Commerce and RBI.

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17

Nikkei PMI indicate continued contraction in April and May 2020

27.430.8

5.412.6

010203040506070

PMI

Indices April 2018 to May 2020

PMI Manufacturing PMI ServicesNote: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates .Source: CSO

Source: Nikkei PMI

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18

Inflation trends

3.0 7.6 5.8

0.4

14.7

8.8

12.0

8.5

-2.00.02.04.06.08.0

10.012.014.016.0

% y

-o-y

cha

nge

CPI and CPI Food Inflation (excluding meat & fish)

CPI CPI Food Inflation

Source: MoSPI and Office of Economic Advisor

Presenter
Presentation Notes
Food inflation has shown divergent trends for WPI and CPI in April and May 2020. While CPI increased in April 2020, before declining in May 2020, WPI inflation continued to decline through April and May 2020. Fuel and light inflation showed similar trends in both WPI and CPI, continuously declining through April and May 2020. Overall we expect headline inflation to be 6 per cent in Q1:2020-21 and 7 per cent for the full financial year 2020-21. However, much will depend on the pace of supply response to the fiscal and monetary policy stimuli that have been provided. Business expectations and other evidence suggests that at present the decline in demand has exceeded supply side disruptions, hence the decline in inflation. By the same token a faster recovery of demand in response to stimulus policies relative to supply responses is expected to lead to a rise in inflation later in the year as is also indicated by the policy simulations in chapter 2.
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19

Decomposition of the Atmanirbhar Bharat (AB) Stimulus Package

Item Amount(Rs trillion)

GDP (%) Remarks

Total (Stimulus component only)

18.7 9.3AB includes reforms, etc. + fiscal & monetary/credit components, only latter included here as stimulus

RBI liquidity injection 8.0 4.0 Undertaken prior to 13 May, 2020.Mainly adding to M3

AB credit guaranteemeasures 8.1 4.1

Implementation contingent on financial institutional decisions.Will add to M3

Fiscal component 2.6 1.3 Will add to fiscal deficit

Contingent Liability 0.9 0.5 No stimulus impact.Not included in Rs 18.7 trillion.

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20

Fiscal Stimulus Budget plus Post-Budget

• The 11.7% of GDP total excludes extra budgetary resources such as 0.9% of GDP in the Central budget and any State Government off-budget borrowing. So total Public Sector Borrowing Requirement could be around 13% or more.

• This is a very strong fiscal stimulus, coming together with RBI liquidity injection plus additional credit guarantees (especially for MSMEs) adding up to over 8% of GDP on the monetary side

• Impact of such strong demand stimulation will depend on strength of supply response

Item GDP (%)Central Government Budget Deficit 3.5

Post-Budget additional borrowing 2.1

AB fiscal component 1.3

States’ Budget 2.8

Additional borrowing headroom for states 2.0

Total 11.7

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21

Scenarios GDP growth(%)

Inflation (%)

Fiscal Deficit (as % of GDP)

CAD(as % of

GDP)Counterfactual

Scenario (-) 12.4 4.5 6.4 1.4

Base case 1.3 5.5 7.6 2.8

Scenario-1 0 6.03 7.8 2.6

Scenario-2 (-)2.0 6.44 7.8 2.3

Scenario-3 (-)5.0 6.71 7.6 1.8

Scenario-4 (-)10.0 7.78 7.4 1.1

Impact of Fiscal & Monetary Stimulus

Main takeaways from these scenarios:

• The stimulus measures can drive a strong recovery in the absence of supply constraints. However, strong supply constraints are likely to be binding.

• Inflation, fiscal deficit and current account deficit may be somewhat elevated in some scenarios but not alarming

• A sudden acceleration in portfolio capital flight could be de-stabilising. This risk is not factored into the simulations.

Page 22: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

22Source: RBI

5.15

4

33.5

44.5

55.5

66.5

77.5

8%

Rates and Yields, % (January to May 2020)

Policy Repo Rate Reverse Repo Rate91-Day Treasury Bill (Primary) Yield 364-Day Treasury Bill (Primary) Yield10-Year G-Sec Par Yield (FBIL)

Weak Transmission

22

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23

Non-food credit growth has declined sharply since Q3: 2018-19

6.37.1

12.5

10.0

12.512.2

13.713.0

12.0

8.7

6.4 6.1

5.0

10.0

15.0

Non

-foo

d C

redi

t (%

y-o-

y)Non-food Credit

Source: RBI

Presenter
Presentation Notes
Page 24: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

24

Credit growth has declined further in 2020

24

7.8 7.21.5

3.98.3

16.1 15.910.0

3.9 1.7

-2.2-6.4

2.7

11.2 12.1

3.0

-10.00-5.000.005.00

10.0015.0020.00

Growth Rate of Bank Credit by Sectors (%, y-o-y)

26-04-19 24-04-20

Source: RBI

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25

Rising Risk Aversion and Stalled Bank lending

• Rising risk aversion against lending to NBFCs due to scams like IL&FS & coronavirus crisis─ Targeted Long Term Repo Operations (TLTRO 2) of ₹25,000 crore, intended for directing credit to

NBFCs remained only half subscribed.─ But NBFCs are the main source of credit for MSMEs.

• Similar rising risk aversion in lending to MSMEs.

• Such risk aversion likely to increase under Covid-19 crisis ─ MSME borrowers also averse to borrowing under present conditions ─ Credit flow to MSMEs has virtually dried up─ Need credit guarantees or partial credit risk guarantees

• Atmanirbhar Bharat package (13 May 2020) include these provisions ─ Government credit guarantee for MSMEs─ RBI Partial credit guarantee for NBFCs.

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26

Challenge of Massive Government Borrowing

• Total government borrowing programme of well over ₹ 17 trillion ( 8.8-10.8% of GDP).

─ Announced Central government borrowing programme of 6% of GDP, including ₹1.3 trillion additional borrowing to finance fiscal component of AB package.

─ This also includes State government borrowing of up to 4.8% of GDP, including recently provided additional headroom of 2% of GDP.

• Government borrowing on such a scale unprecedented in India, not clear if financial system can cope

• Multiple channels need to be used to face this massive demand for sovereign loans

─ Market borrowing with part indirect monetisation in secondary market by RBI.─ Further liberalisation of ‘Ways and Means' advances, subsequently converting them to dated securities.─ Direct monetisation of residual deficit by RBI, lender of last resort, through private placements

• Finally, it may be necessary to spread this borrowing over two years, 2020-21 & 2021-22 in order to maintain financial stability while reviving the economy.

Page 27: JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1€¦ · JUNE UPDATE Quarterly Review of the Economy, 2020-21:Q1. in Coronavirus times. Sudipto Mundle, Bornali Bhandari, N

Thank You!