State of Indian Economy ES 2020

Economic Survey 2019-20 State of Indian Economy

Economic Environment

  • The World Economic Outlook (WEO) Update of January 2020 published by IMF has estimated the global output to grow at 2.9 per cent in 2019, declining from 3.6 per cent in 2018 and 3.8 per cent in 2017.
  • The global output growth in 2019 is estimated to be the slowest since the global financial crisis of 2009, arising from a geographically broad-based decline in manufacturing activity and trade.

Growth of Indian Economy

  • The WEO of October 2019 has estimated India’s economy to become the fifth largest in the world, as measured using GDP at current US$ prices, moving past United Kingdom and France. The size of the economy is estimated at US$ 2.9 trillion in 2019.
  • Given India’s record of growth with macroeconomic stability over the last five years (annual average growth rate of 7.5 per cent and annual average inflation of 4.5 per cent), the economy is poised for a rebound towards the US$ 5 trillion goal.
  • Based on first Advance Estimates of India’s GDP growth for 2019-20 recorded at 5%, an uptick in GDP growth is expected in H2 of 2019-20. The government must use its strong mandate to deliver expeditiously on reforms, which will enable the economy.
  • Since 2011-12, India recorded its lowest quarterly GDP growth in Q4 of 2012-13 (Figure 9). After 13 quarters, the economy achieved its highest quarterly growth of 9.4 per cent in Q1 of 2016-17. Again after 13 quarters, the economy has recorded a low growth of 4.5 per cent in Q2 of 2019-20.
  • A sharp decline in real fixed investment induced by a sluggish growth of real consumption has weighed down GDP growth from H2 of 2018-19 to H1 of 2019-20.
  • Real consumption growth, however, has recovered in Q2 of 2019-20, cushioned by a significant growth in government final consumption.

Sector-wise Growth

  • As per First Advance Estimates, growth in real GDP during 2019-20 is estimated at 5.0 per cent, as compared to the growth rate of 6.8 per cent in 2018-19. The nominal GDP is estimated at Rs. 204.4 lakh crore in 2019-20 with a growth of 7.5 per cent over the provisional estimates of GDP (Rs. 190.1 lakh crore) for 2018-19.
  • The contribution of total consumption and net exports in GDP at current prices are estimated to increase in 2019-20 vis-à-vis 2018-19. Fixed investment as percentage of GDP at current prices is estimated to be 28.1 per cent in 2019-20, lower as compared to 29.3 per cent in 2018-19.
  • According to Advanced Estimates, Agriculture and Allied Sector recorded a growth of 2.9 % in 2019-20 as compared to 6.6% in 2018-19 (provisional estimates) and 6.9% in 2017-18 (revised estimates). Share of agriculture and allied sectors in the total GVA of the country has declined from 2009-14 to 2014-19 mainly on account of relatively higher growth performance of tertiary sectors.
  • According to Advanced Estimates Industry recorded a growth rate of 2.5%% in 2019-20 as compared to 6.9% in 2018-19 (provisional estimates) and 5.9% in 2017-18 (revised estimates). The industrial growth rate was mainly driven by electricity, gas, water supply and other services (5.4%), manufacturing (2%) and mining and quarrying (1.5%%) while the construction sector recorded a growth rate of 3.2% in 2019-20. The contribution of industrial activities to GVA has also declined from 2009-14 to 2014-19. Manufacturing sector, which contributes more than 50 per cent of industrial GVA, has driven the decline while the share of construction sector has also moderated.
  • According to Advanced Estimates Services Sector recorded a growth rate of 6.9% in 2019-20 as compared to 7.5% in 2018-19 (provisional estimates) and 8.1% in 2017-18 (revised estimates). The performance of services sector was driven by Public administration, defence and other services (9.1%); financial, real estate& professional services (6.4%) and trade, hotel transport, communication and services related to broadcasting (5.9%) in 2019-20, all of these recording a lower growth rate as compared to the previous years. Services sector has moved ahead faster, distancing itself further from agriculture and industry. Financial, real estate and professional services has driven the increase in the contribution of service sector followed by public administration.

Capital Formation

  • The Indian economy, since 2011-12, has been under the influence of slowing cycle of growth. The fixed investment rate has started declining sharply since 2011- 12 and subsequently plateaued from 2016- 17 onwards. The impact of the decreasing investment rate on GDP growth has most pronounced after four years as seen in deceleration in growth since 2017-18.
  • The drop in fixed investment by households from 14.3 per cent to 10.5 per cent explains most of the decline in overall fixed investment between 2009-14 to 2014-19. Fixed investment in the public sector marginally decreased from 7.2 per cent of GDP to 7.1 per cent during the two periods. However, the stagnation in private corporate investment at approximately 11.5 per cent of GDP between 2011-12 to 2017- 18 has a critical role to play in explaining the slowing cycle of growth and, in particular, the recent deceleration of GDP and consumption.
  • Change in household investment contributed to increasing consumption in the period until 2016-17 (Figure 33). A drop in savings in physical assets of households has been observed over this period . Income not saved in physical assets by households is either saved in the form of valuables (gold or silver) or as net household financial savings or is consumed. During 2011-12 to 2016-17, when savings in physical assets dropped, neither savings in gold and silver by households nor net household financial savings rose as a proportion of GDP. Thus, it appears that resources not deployed by households in physical assets 2011-12 onwards were mostly expended on consumption.

Fiscal situation

  • In 2019-20, Centre’s fiscal deficit was budgeted at Rs. 7.04 lakh crore (3.3 per cent of GDP), as compared to ` 6.49 lakh crore (3.4 per cent of GDP) in 2018-19 PA. In the first eight months of 2019-20, fiscal deficit stood at 114.8 per cent of the budgeted level.
  • Net Tax revenue to the Centre, which was envisaged to grow at more than 25 per cent in 2019-20 BE relative to 2018-19 PA, grew at 2.6 per cent during April to November 2019, which was nearly half its’ growth rate for the corresponding period last year.
  • This is primarily owing to low growth in Gross Tax Revenue (GTR) of 0.8 per cent during first eight months of 2019-20 vis-a-vis 7.1 per cent growth for the corresponding period in 2018-19..
  • Goods and Services Tax (GST) collections, the biggest component of indirect taxes, grew by 4.1 per cent for the Centre during April-November 2019. However, the uptick in growth of cumulative GST collections for the Centre started in October 2019 and has sustained its momentum in November and December 2019 as well.
  • Specifically, the GST (Centre + States) collection for the month of November 2019 was the third highest monthly collection since introduction of GST (July 2017). From April-December 2019, gross GST revenue collection has crossed the mark of Rs.1 lakh crore five times with revenue of Rs.1.03 lakh crore in December 2019. This may be the result of concerted efforts taken by the Government to improve tax compliance and revenue collection as well as a reflection of a rebounding economy.
  • On the expenditure side, the budgeted expenditure of the Central government grew at 12.8 per cent in April-November 2019 over the corresponding period of the previous year, expending almost 60 per cent of the budget. The capital expenditure during April to November 2019-20 has grown at roughly three times vis-à-vis the same period in 2018-19. Also, revenue expenditure has grown at a higher rate during these eight months of 2019-20, compared to the same period previous year.

Monetary Policy and credit flow

  • The stance of the Monetary Policy Committee of Reserve Bank of India continued to be accommodative as it reduced the policy repo rate by 135 basis points since February 2019. The rate cut along with excess liquidity in banks was expected to transmit well into lowering interest rates. However, the transmission has varied across different market segments.
  • The growth of bank credit which was picking up in H1 of 2018-19, started decelerating in H2 of 2018-19 and further in H1 of 2019-20. The deceleration was witnessed across all major segments of non-food credit, save personal loans which continued to grow at a steady and robust pace. The deceleration in credit growth was most in the services sector. Credit growth to industry also witnessed a significant decline in recent months, both for MSME sector as well as large industries. Agriculture and allied activities benefited from a higher growth of credit.
  • Decline in credit growth has been attributed to growing risk aversion of banks that continue to apprehend the build-up of Non-Performing Assets (NPAs). This is despite the admission of more than 2000 corporate insolvency resolution processes between December 2016 and June 2019.

Inflation

  • Headline inflation rose from 3.3 per cent in H1 of 2019-20 to 7.4 per cent in December 2019 on the back of temporary increase in food inflation, which is expected to decline by year end. Rise in CPI-core and WPI inflation in December 2019 suggests building of demand pressure.
  • There has been a further uptick in headline inflation in the month of December 2019 to 7.35 per cent contributed mainly by supply side factors. The food prices spiked following unseasonal rainfall and a flood-like situation in many parts of the country, which affected agricultural crop production.
  • The Wholesale Price Index (WPI) inflation, on the other hand, declined sharply from 3.2 per cent in April 2019 to 2.6 per cent in December 2019, reflecting weakening of demand pressure in the economy.
  • The lagged effect of previous cuts in the repo rate is showing up in the build-up of demand pressure. CPI-core inflation has risen from 3.4 per cent in October 2019 to 3.6 per cent in November 2019 and further to 3.8 per cent in December 2019. WPI Inflation has also been rising from zero per cent in October 2019 to 0.6 per cent in November 2019 and 2.6 per cent in December 2019.

External Sector Developments

  • India’s external sector gained further stability in H1 of 2019-20, with a narrowing of Current Account Deficit (CAD) as percentage of GDP from 2.1 in 2018-19 to 1.5 in H1 of 2019-20, impressive Foreign Direct Investment (FDI), rebounding of portfolio flows and accretion of foreign exchange reserves. Imports have contracted more sharply than exports in H1 of 2019-20, with easing of crude prices, which has mainly driven the narrowing of CAD.
  • The contraction in import bill was partly contributed by a decline in oil prices in the current year as compared to 2018-19 while slower contraction of exports may have resulted from a pick-up in global activity.
  • Lower Current Account Deficit (CAD) reflects reduced external indebtedness of the country making domestic economic policy increasingly independent of external influence. The CAD, which was 2.1 per cent of GDP in 2018-19, has improved to 1.5 per cent in H1 of 2019-20 on the back of significant reduction in trade deficit.
  • Despite muted growth of services exports, the trade balance on the services account continued to be positive in 2019-20. The trade surplus on services account has been estimated at US$ 40.5 billion in H1 of 2019-20 , as compared to US$ 38.9 billion in 2018-19.
  • During 2014-19, gross FDI to India has been robust as compared to the previous five years; the trend has continued in 2019-20 as well. In the first eight months of 2019-20, both gross and net FDI flows to the country have been more than the flows received in corresponding period of 2018- 19. Net FPI inflow in H1 of 2019-20 was also robust at US$ 7.3 billion as against an outflow of US$ 7.9 billion in H1 of 2018-19.
  • The foreign investors continue to show confidence in India. The country has attracted a net FDI of US$ 24.4 billion in April-November of 2019-20 as compared to US$ 21.2 billion in April-November of 2018-19. Net FPI inflow in April-November 2019-20 was positive at US$ 12.6 billion as against an outflow of US$ 8.7 billion in April-November 2018-19.

Employment

  • As per the latest available data on employment, there has been an increase in the share of formal employment, as captured by ‘Regular wage/salaried’, from 17.9 per cent in 2011-12 to 22.8 per cent in 2017-18. This 5 percentage points increase in the share of ‘Regular wage/salaried’ group has been on account of 5 percentage points decrease in the share of casual workers, which reflects formalization in the economy.
  • As a result, in absolute terms, there was a significant jump of around 2.62 crore new jobs over this period in the usual status category with 1.21 crore in rural areas and 1.39 crore in urban areas.
  • Remarkably, the proportion of women workers in ‘Regular wage/salaried’ employees category has increased by 8 percentage points (from 13 percent in 2011- 12 to 21 per cent in 2017-18) with addition of 0.7 crore new jobs for female workers in this category.
  • The drop in casual labour has mainly originated from the rural sector where rural labourers have shifted from agricultural to industrial and services activity. In urban region, there has been a shift of employment from self- employed to salaried jobs.

 Economic Outlook

The IMF in its January 2020 update of World Economic Outlook has projected India’s real GDP to grow at 5.8 per cent in 2020-21. World Bank in its January 2020 issue of Global Economic Prospects also sees India’s real GDP growing at 5.8 per cent in 2020-21.

Downside risks

  • Continued global trade tensions may affect trade, investment and growth.
  • Slow implementation of IBC Code has the risk of aversion of banks to lend further
  • Investment in the public sector may increase, as is expected after the announcement of the National Infrastructure Pipeline (NIP) of projects worth Rs 102 lakh crore.
  • Should productivity gains not significantly increase with reforms, it may raise the requirement of fixed investment rate to boost economic growth.
  • A non-rising gross domestic savings rate may further deteriorate the CAD, depreciate the rupee and make the virtuous cycle more difficult to realise.

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