FICCI projects GDP growth for 2020-21 at -4.5%; signs of an impending slowdown

The latest round of FICCI’s Economic Outlook Survey puts forth an annual median GDP growth forecast for 2020-21 at (-) 4.5%. The minimum and maximum growth estimate stood at (-) 6.4% and 1.5%, respectively for 2020-21.

The quarterly median forecasts indicate GDP to contract by (-) 14.2% in the first quarter of 2020-21. The official growth numbers for the first quarter are expected to be released by the end of August 2020.

There were already signs of an impending slowdown in the economy, which have been sharply accentuated by the COVID-19 pandemic induced lockdown. The spread of COVID-19 pandemic has severely hit global as well as domestic growth.

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The current round of the survey was conducted in the month of June 2020 and drew responses from leading economists representing industry, banking, and financial services sector.

Economic activity wise annual forecast indicated a median growth of 2.7% for agriculture and allied activities for 2020-21. Agriculture seems to be the only sector with a silver lining right now. There is an apparent upside as far as the performance of monsoon is concerned this year and the water reservoir levels in the country stand at good levels.

The rural sector supported by a steady agriculture performance and hopefully a contained number of COVID-19 cases will be a key demand generator for India this year. Further, the direct income support through PM-KISAN and increased allocation to MGNREGA is helping the returnee migrants - lending support to the rural economy.

Besides, there has been a significant focus in the economic package on the agriculture sector and the focus has clearly been on bridging the existing gaps while creating the potential for new opportunities.

The overall approach has been holistic, trying to address the marketing, infrastructure, supply chain, livestock disease management, rural livelihood issues.

Industry and services sector, on the other hand, are expected to contract by 11.4% and 2.8%, respectively in 2020-21. Weak demand and subdued capacity utilisation rates were already manifesting into a drag on investments and the Covid-19 pandemic has further extended the timeline for recovery.

Even though activity in sectors like consumer durables, FMCG, etc., is gaining traction, majority of the companies are still operating at low capacity utilisation rates. Labour availability and feeble demand remain as major issues for the companies.

Therefore, fresh investments will be difficult to come by in the near to medium term. Also, a significant change in consumption patterns is expected on back of uncertainty with regard to jobs and income losses. Expenditure on non-essential goods is likely to remain under check for some time. In fact, the share of private final consumption expenditure in GDP has already reported a decline from 59.9% in Q3 FY20 to 55.9% in Q4 FY20.

Absence of demand stimulus, a second wave of the pandemic and continuation of social distancing and quarantine measures will weigh heavy on growth prospects. With demand and investment outlook muted, robust government expenditure has been the only saviour. Nonetheless, growth is likely to bottom out post the second quarter of current fiscal year.

Some of the stimulus measures are reaching to the ground – especially through the credit guarantee scheme for MSMEs and support through MGNREGA – which is positive.

The median growth forecast for IIP has been put at (-) 11.5% for the year 2020-21 with a minimum and maximum range of (-) 15.3% and 1.0%, respectively.

The outlook of participating economists on inflation remained modest. WPI based inflation rate is projected at -0.3% in 2020-21, with a minimum and maximum range of (-) 1.5% and 2.5%, respectively.

On the other hand, CPI based inflation has a median forecast of 4.4% for 2020-21, with a minimum and maximum range of 3.3% and 6.0%, respectively.

On the external front, the median current account balance forecast has been pegged at (-) 0.3% of GDP for 2020-21.

In addition to the forecast of key macro variables, economists were asked to share their views on certain contemporary subjects as well.

Economists were asked to share their views on the fiscal stimulus package 2.0 and any additional measures that can be undertaken. Participants were of the view that government measures in Stimulus 2.0 focussed broadly on saving lives and on undertaking deep structural reforms. They, therefore, felt that while the quasi fiscal measures and structural reforms announced were undoubtedly steps in the right direction, on ground implementation and results will take a long time to work through in the present environment.

A majority of economists believed that the government could have undertaken a more aggressive fiscal stance than what has been announced in the two packages combined.

Participating economists highlighted that the measures announced by both RBI and the government focussed largely on addressing supply side constraints with limited support for creation of demand.

They strongly felt that there is a need to provide more measures to boost demand conditions in the economy. Reviving demand in the economy currently holds greater importance not only because India is broadly a consumption driven economy but also because investments driven growth is unlikely to gather momentum despite all the right measures as corporate India is reeling with excess idle capacity.

Apart from pure cash transfers, the government could also consider GST rate reductions especially in the non-essential goods segment which has the potential to drive demand. Furthermore, some sort of tax waivers could also be undertaken for low income groups. Alongside, sector specific measures could also support recovery in a big way. Sectors with high backward and forward linkages such as automobile, construction, housing etc. could be revived without incurring fiscal strain. Steps such as announcing of vehicle scrappage policy coupled with cash rebates which could be funded by additional GST revenue flowing from higher production, providing sovereign guarantee on incomplete housing projects should be considered.

Moreover, the economists were also asked to share their suggestions on further monetary policy actions that can be undertaken by the Central Bank.

The participants unanimously believed that the RBI would undertake further cuts in the repo rate going forward to minimize the economic shock and stabilise financial markets.

Nonetheless, a majority of the participants also opined that cutting interest rates would not pump economic growth given that the demand conditions have remained subdued from even before the covid pandemic struck the economy.

Economists felt that banks remained risk averse.  Participants said that while the RBI has been proactive in addressing liquidity constraints in the economy, most measures have not yielded expected results. A muted response to TLTRO 2.0, which was designed to help NBFCs, is one example. The scheme has only benefitted AAA rated companies, while many NBFCs and in turn MSMEs have been left out.

Additional Suggestions/ Expectations from the RBI:

• A one-time loan restructuring could be brought in when visibility on cash flows, especially for MSMEs, improves
• Widen the policy corridor further by reducing Reverse repo rate more aggressively
• Further increase the refinancing window for SIDBI/NHB/NABARD to facilitate lending to low rated companies. The government’s guarantees announced recently would help with associated credit risks this time around.
• RBI should also relax end use restrictions for refinancing facilities of NABARD, SIDBI and NHB
• Given that these are extraordinary times, the RBI should start supporting non-G-sec market by directly buying corporate papers. This should ease funding rates for lower credit rated borrowers.
• Limits on lending via TLTRO schemes must be set to enable availability of greater proportion of funds towards non-AAA investment grade companies

In addition, economists were asked to suggest ways with which India could best utilise the present opportunity to expand its presence in the global value chains.

Economists believed that India, at present, is poorly integrated with global supply chains. Several constraints still persist on the ease of doing business front as well as infrastructure facilities. Even though labour costs in India are lower as compared to peers, higher logistics and input costs, binding and cumbersome regulatory compliances, labour and land laws etc. pose as major barriers for potential foreign investors.

The world is increasingly looking to relocate their supply chains away from China. For India to benefit from this transition, increasing competitiveness would be the only way forward. Efforts towards liberalization of FDI policy must be complemented with improving infrastructure and ease of doing business in the country.

Additionally, India urgently needs to reform its factor markets, most importantly laws governing land and labour issues. The focus should ideally be on simplifying laws surrounding these critical areas of production to ensure greater worker and capital productivity. India’s huge domestic market as compared to its peers is an asset and a major attraction for potential investors.

On ground implementation of easing regulatory hurdles and the business environment is much desirable.