Bumpy Ride Ahead for Economy as Inflation Accelerates

Rising well above the Reserve Bank of India’s (RBI) medium-term inflation target of 4 per cent, retail inflation accelerated to a 15-month high in November amid the ongoing seasonal surge in vegetable prices and an unfavourable base effect from last year.

According to Central Statistics Office (CSO) data released, retail inflation accelerated to 4.88 per cent in November over the same month last year. CPI Inflation in October had stood at 3.58 per cent, while it was at 3.28 percent in September.

As per the data, the surge in inflation was led by a 22.5 per cent rise in the prices of vegetables. Higher vegetable prices have kept India’s inflation on the rise since July, after hitting an all-time low. Rising oil put further pressure on inflation. Brent crude prices increased 9.1 per cent month-on-month during November. According to analysts, this has affected fuel inflation and spilled over to the transport category.

Adding to the economic woes, the industrial output hit a three month low as it continued to witness a negative trend and fell 2.2 per cent on annual basis in October.

Data showed that subdued performance of mining and manufacturing sectors coupled with a contraction in output of consumer durable weighed on the industrial output. This shows that the turnaround in investment and demand is yet to resume in earnest. The same data last year registered a positive trend of 4.2 per cent. The alarming figures come in the aftermath of the slowed GDP figures earlier this year.

Headline inflation has already breached the central bank’s revised forecast that consumer prices will range between 4.3-4.7 per cent for the rest of the current fiscal. The RBI had held interest rates steady during its December monetary policy warning of upside risks to inflation and marginally increasing its estimates. The central bank noted that the moderation in core inflation, which excludes food and fuel prices, seen in the first quarter, has now reversed. As per Economists, RBI is likely to hit the pause button on interest rates for the remainder of the current fiscal.

Further, the impact of the reduction in GST rates on a number of items may pass through into retail prices and inflation in the coming weeks. However, the continued impact of the HRA revision on housing inflation and elevated fuel prices suggest that the CPI inflation is likely to be in a range of 4.4-4.7 per cent in the remainder of FY2018.

Latin Manharlal Group

Nov Manufacturing Improves as Note Ban & GST Impact Fades

India’s manufacturing activity has shrugged off note ban and GST worries as the factory activity quickened in November at the fastest pace since the government’s surprise cash clampdown late last year, indicating that the economy is strengthening in the third quarter.

According to a Markit Economics report,Nikkei India Manufacturing Purchasing Managers Index,a gauge measuring activity in the manufacturing sector surged to 52.6 in November from 50.3 in October, with a reading above 50 signaling expansion.

The upsurge in the headline index was driven by a marked increase in output on account of higher order book volumes and a fall in tax rates under the Goods and Services Tax regime. A new orders sub-index bounced back into expansionary territory to 54.2 in November from 49.9 the month before.

Moreover, stronger factory production levels translated into the fastest rate of employment creation since September 2012. Besides, export growth rose for the first time in three months as overseas demand for Indian goods improved. On the price front, input cost inflation quickened to the fastest since April, but firms were unable to fully pass on higher cost burdens to price-sensitive clients. The findings add to evidence that a recovery in Asia’s third-largest economy is on track.

The manufacturing sector had been hit hard by the government's move to scrap some high-value notes in November last year, while implementation issues linked to the GST had hurt businesses. The sharp cut in GST rates for more than 200 items had also helped boost sentiment in the sector.

Improved manufacturing activity reinforces the revival in India's gross domestic product growth. The recent GDP data showed that the economy reversed five quarters of slowdowns to post 6.3 per cent growth in the July-September quarter compared with a three-year low of 5.7 per cent in the previous quarter.

While there are some weak spots in the manufacturing sector and overall economy, the data however now points that economy seems to have weathered the transitional challenges experienced earlier in the year and appears poised for a durable recovery going forward.

Latin Manharlal

Moody’s Gives Thumbs Up to Indian Economy

Overlooking a haze of short-term economic uncertainties and pinning faith in the continued progress on economic and institutional reforms, Moody’s Investor Services has upgraded India’s sovereign rating, citing that the reforms will improve the business climate in the country and raise productivity.

Global ratings agency, Moody's Investors Service has raised India’s sovereign rating for the first time since 2004, from the lowest investment grade of Baa3 to Baa2, changing the outlook from stable to positive.

Moody’s decision comes as an appreciation for Prime Minister Narendra Modi’s government and the reforms it has pushed through. It comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings. With the ground paved for institutional players from around the globe to not only pump in money but also set up shops, India’s stature in the international arena is bound to rise further.

Moody’s praised Modi’s efforts to broaden the tax base and tackle non-performing loans in India’s $2.3 trillion economy, Asia’s third-largest. The rating agency also hailed introduction of the GST, a landmark reform that turned India's 29 states into a single customs union for the first time and expects that it will promote productivity by removing barriers to interstate trade.

The upgrade adds to a string of good news for Modi. With this rating upgrade, the cost of capital will reduce and more FDI is expected to flow in, as certain investors don't invest in countries rated below Baa3.

While Moody’s acknowledged that the impact of these measures will take time to reflect, and some, such as the GST and demonetisation, have undermined growth, it expects real GDP growth to moderate to 6.7 per cent in the financial year ending in March 2018, with a pick up to 7.5 percent in the following year and similarly robust levels from 2019 onward.

However, the government's debt is a cause for concern, noted Moody's - with the debt to GDP ratio at 66 per cent in 2016 against a comfort level of 44 per cent in this particular rating category. This could severely hamper the government's ability to take any more debt for infrastructure projects, relying instead on issuing bonds, which may find greater acceptability due to the ratings upgrade.

Nevertheless, as disruption fades Indian economy is expected to register robust levels of growth. Stronger consumption and fiscal reforms are expected to improve business confidence and investment confidence in the country.

Latin Manharlal Group

Bank Recapitalization To Help PSBs Find Their Feet Again

At a time when the stock markets are surging to new highs every other day, there was very little to cheer for the banking sector, mainly for the public-sector banks burdened with ballooning Non-performing assets (NPA), which resulted in low loan book growth. Amidst this situation, the NDA government has come up with a big bang bank recapitalization, announcing massive infusion to perk up PSU banks.

On October 24, the government announced a huge infusion of funds into state-owned banks. The recapitalisation package, amounting to Rs 2.1 lakh crore (the size of 1.3 per cent of the country’s GDP), included Rs 1.35 lakh crore via bank recapitalisation bonds to be issued to public sector banks and Rs 76,000 crore from budgetary support and market loans.

The Rs 2.11 lakh crore capital infusion into the banking sector will come over the next two years. It will come in three parts. The government itself will directly pay banks Rs 18,000 crore by buying their shares. It will also encourage banks to raise Rs 58,000 crore from the market, so there’s a 75-25 government-private infusion of new money into banks.

By injecting capital, the government is trying to partially improve the balance sheets of public sector banks, which could pave the way for them to be sold. This will also assist banks to write off some of the whopping Rs 10 lakh crore bad loans currently on their books.

As per economists, the package will help public sector banks to accelerate provisioning for stressed assets, speed up the NPA resolution process and support the clean-up of balance sheets. Moreover, it will help these banks focus on reviving credit growth. Recapitalisation will arm banks with enough capital to lend, as and when the economy rebounds.

From an economic perspective, the reach and distribution of PSU banks is very critical thus making it an important source of funding for the large section of the economy as evident by their dominant market share. Once banks are adequately capitalised, an important requirement to fund faster economic growth will be in place. In this way, this announcement sets the stage for an economic revival.

However, the economic recovery depends on number of factors. Business confidence is at an all time low and private investment too has been on a downward slide. Excluding for roads, there haven’t been many avenues of growth in government spending in infrastructure. Having said that, banks remain the heart of the financial system in India and their capitalization is critical for savings mobilization, credit offtake and revival of investment demand over the medium term. 

Going forward, the recapitalisation move coupled with other structural reforms such as bankruptcy code, Goods and Services Tax, RERA and Direct Benefit Transfer would set the base for re-acceleration of India’s growth momentum over the medium term.

Latin Manharlal Group

RBI Presses Pause Button; Lowers Growth Forecast

Citing upside risks to inflation, the central bank has refrained from changing key lending rates and maintained a neutral stance, suggesting that any further rate cuts are not a given.

The Reserve Bank of India's monetary policy committee (MPC) in its fourth Bi-monthly policy review kept the key repo rate unchanged at 6.00 per cent and the reverse repo rate unchanged at 5.75 per cent. However, the statutory liquidity ratio (SLR) was cut by 50 basis points to 19.5 per cent, effective fortnight starting October 14.

The MPC observed that retail inflation has risen by around two percentage points since its last meeting in August amid an escalation of global geopolitical uncertainty and heightened volatility in financial markets. RBI expects inflation to surge from its current level and range between 4.2-4.6 per cent in the second half of this year.

Going forward, the central bank has revised its gross value-added (GVA) growth forecast to 6.7 per cent for the current fiscal year from 7.3 per cent earlier. RBI said the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif food grains production are early setbacks that impart a downside to the outlook. The central bank noted goods and service tax implementation seems to have an adverse impact as it made prospects of the manufacturing sector uncertain which may further delay investment revival.

As economic growth has been slowing for five quarters, the pressure is building on the government to announce a stimulus package to spur growth. India’s real or inflation-adjusted gross domestic product grew 5.7 percent in April-June, the slowest in 13 quarters. RBI suggests that for improving economic growth, deleveraging of balance sheets and recapitalisation of banks was essential.

The central bank will continue to watch the inflation trajectory for months before taking a call on the next rate cut which can only happen if growth drops much below its annual projection. Even a drop in the second quarter may not move the central bank to act as it may like to wait and watch at least till the December quarter growth figures are out.

Latin Manharlal Group

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Indian Economy Losing Steam Amid Soft IIP Numbers and Rising Inflation

The challenges for Indian economy seems to be mounting as data on the Index of Industrial Production (IIP) and consumer price index (CPI)-based inflation comes as bad news for the Narendra Modi government, with a clearer evidence of slowdown after growth of gross domestic product (GDP) crashed to its lowest last week.

The IIP data shows that it has grown by only 1.2 per cent, while it grew at 4.5 per cent in the same month last year, signaling that the industrial activity and manufacturing are still reeling under the impact of demonetisation and Goods and Services Tax (GST).

Adding to the woes, August's consumer price index inflation shot up to a five-month high at 3.36 per cent from 2.36 per cent in July, dampening chances of a rate cut by the central bank. According to economists, rise in inflation for two straight months has reduced the chances of another rate cut by the RBI in a policy review next month, which has a central inflation target of 4 per cent. Last month, the RBI had cut its key lending rate by 25 basis points to 6 per cent in view of softening inflation.

The GST rollout has caused many problems within the manufacturing sector, and reports suggest that the fall in IIP in June, mostly part of the formal economy, was because of pre-GST stocking. But the continued low rate of IIP in July showed that industrial recovery impacted by GST and demonetisation within eight months of each other is suffering under the weight of both the decisions.

However, the silver lining is that economists expect industrial recovery to gain momentum as the GST stabilises. 

Considering the inflation numbers, the GST has also made some services, such as health, transportation and communication, recreation and amusement, inflationary. Further, a surge in house rent allowance (HRA) for central government employees also pushed up inflation in rent to 5.58 per cent in August from 4.98 per cent in the previous month. Even when volatile inflation in food and petroleum is taken out, the resultant core inflation rose to 4.5 per cent in August, from 3.9 per cent in the previous month. However, economists are not perceiving inflation as a threat and expect it to remain in the targeted 4 per cent range. 

Latin Manharlal Group

Ease of Doing Business: Still a Long Way To Go

The efforts taken by National Democratic Alliance (NDA) to ease the regulatory environment notwithstanding, the perception of most business enterprises is that little has changed on the ground.

This comes as a wake-up call to the government and a reminder that the legacy of red tape is far more tough to undo than what has been thought so far. The study also reveals that the experience of regulatory reform has not been uniform across the country.

A survey by NITI Aayog and Mumbai based think tank IDFC institute of formal Indian manufacturing firms, has found that, as of the 2016 reforms by the NDA government, factory-owners largely do not feel things had changed excessively.

The results exhibited that for a majority of respondents, parameters such as setting up a business, land and construction, environment, labour, water and sanitation, taxes, and access to finance remained the same compared with a year ago; on legal matters, they reported that things had deteriorated. The survey was conducted in 2016. Last year, the World Bank’s Ease of Doing Business Ranking placed India at a lowly 130 out of 150 countries.

The Niti study has surveyed over 3,000 manufacturing firms all over the country, while the World Bank survey is focused mainly on Delhi and Mumbai, and involves surveying expert opinion to form global rankings.

According to the Niti survey, on an average it took enterprises about two years to resolve a legal dispute and there is wide disparity across states. On an average, companies witnessed around 46 hours of power shortage in a typical month. It took firms 118 days to set up a business. The World Bank's Doing Business survey shows that it takes 26 days to set up a business but this is restricted to Delhi and Mumbai.

Further, the awareness among the firms of government’s actions to improve the business climate is surprisingly low. As per the survey, only 20 per cent of the firms surveyed informed about using single-window systems for setting up a business. A majority of well-established firms nearly 59 per cent didn’t even know of this tool, which greatly eases compliance burden.

However, the study suggests that in labour-intensive sectors like textile, apparel and footwear, more flexible labour laws can aid in scaling up to meet order demand. Improved information to entrepreneurs about “single-window” approvals in states can improve matters. As would better availability of power and finance, especially in poorer states. Undoubtedly, the ease of doing business can be much improved.

Latin Manharlal Group