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Sector-wise data shows that growth in Q3FY19 was pulled down largely by agriculture and public administration
India’s economic growth slowed down to a six-quarter low of 6.6 per cent in the third quarter of the current financial year, showed data released by the Central Statistics Office (CSO). growth is expected to be marginally lower at 6.5 per cent in Q4FY19.
The CSO also lowered its growth estimate for the full year to 7 per cent, down from 7.2 per cent earlier. This implies that over the past five years, the economy has grown at the slowest pace in FY19
Sector-wise data shows that growth in Q3FY19 was pulled down largely by agriculture and public administration.
Agricultural growth slumped to 2.7 per cent in Q3FY19, from 4.2 per cent in Q2FY19.
Similarly, public administration, which connotes On the other hand, construction continued to grow at a robust pace.
The sector is expected to grow at a robust 9.2 per cent in FY19, up from 5.2 per cent in FY18.
And while growth in manufacturing value added slowed down to 6.7 per cent in Q3FY19, from 12.4 per cent in Q1FY19, the sector is expected to grow at a higher 8.6 per cent in FY19, up from 4.6 per cent the year before.
On the expenditure side, CSO data shows that both private as well as government consumption expenditure slowed down in the third quarter of the current financial year. However, gross fixed capita formation, which connotes investments, continued to grow at a robust pace.
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If supply-side polices successfully reduce costs and inflation, macroeconomic policy can afford to be stimulatory
The key issue facing India is how to sustain high growth with low inflation. Its post reform growth has been volatile, and aborted by episodes of high inflation. A useful way to think about the problem is to understand how despite Indian output being below potential, as large numbers enter the labour force, it is still running a current account deficit (CAD) in the balance of payments. India is inside its production possibility frontier yet demand is greater than what it can produce domestically.
If bottlenecks in specific sectors limit production and exports, there can be unutilised capacity together with demand that spills over into a CAD. China, a similarly large country with surplus labour, was also inside its production possibility frontier. Under-valuation of its currency aided an expansion in production of traded goods and of exports that absorbed underemployed labour.
India, however, is dependent on primary energy imports. Depreciation in order to increase exports can raise the import bill and inflation. A big advantage for China was it started its catch-up growth in 1978 with reform that raised agricultural productivity. Low relative food prices are essential for sustained low-inflation growth in populous countries where food has a large share in the consumption basket. Major intermediate commodity imports, such as oil, also contribute to inflation.
China used to export oil but became a net oil importer in 1993. By 2006 it imported 47 per cent of its consumption, and by 2013 became the largest oil importing country. But by then its exports had grown enough to finance imports without materially reducing its current account surplus.
China started its reforms process with a very low share of oil imports, but in India this was high to begin with. India is the third largest oil importer. In 2009-10, crude oil imports amounted to 80 per cent of its domestic crude oil consumption and 31 per cent of its total exports compared to 14 per cent for China.
India’s dependence on commodity imports implies limiting depreciation would help contain inflation. A real appreciation may help keep traded goods such as oil and food cheaper. Then on its growth path consumption of both traded and non-traded goods rises but production shifts relatively more towards non-traded goods, as their relative prices rises. India has seen higher inflation in non-traded services such as health and education. Even so, exports have to expand in sectors with potential. India’s outsourcing and other service exports helped finance its oil imports.
Even if there is a CAD, better utilisation of resources and expansion of capacity in export sectors may eliminate it without having to reduce aggregate demand. A CAD also implies investment exceeds domestic savings. Financial savings largely fund investments involving goods that are tradeable, while physical savings are invested more in non-traded goods, such as in real estate.
Estimates of physical savings in the household sector are identical to those of investment in the unorganised sector. It follows, then, that if organised sector investment exceeds financial savings, it will have to be financed by foreign savings that is, by running a CAD. In recent years although the savings-GDP ratio has fallen to about 30 as growth slowed, it is household physical savings that have fallen, while household financial savings have recovered from a low of 8 per cent in 2011-12. Savings of non-financial corporations that are held in financial assets have risen. Thus better financial intermediation of domestic savings also reduces the CAD and dependence on volatile foreign capital inflows.
Alleviation of constraints
Constraints in agriculture have been a major factor limiting India’s growth. For example, high food inflation triggered macroeconomic tightening and reduced growth after 2011. A large number of subsidies and price distortions were not able to adequately improve food production.
By 2018, however, India seems to have entered a period of structural agricultural surpluses. World political economy also seems to be working to keep oil prices in the $60-70 range, which suits both oil importing and exporting countries, since it maintains future oil supplies thus reducing volatility. Moreover, with better pass through of oil prices, India’s oil intensity has been falling since 2005.
Constraints are being removed but even so specific competitive sectors must be encouraged for the export expansion required to cover the oil import bill, which remains large.
Supply side policies
A constant or mildly appreciating real exchange rate has to be accompanied by focused sectoral and general supply-side measures to improve exports. The WTO bans industry specific subsidies as trade distorting, but developing and LDCs, with per capita incomes of $1000 (in constant US 1990 $) are allowed exemptions. India crossed the threshold in 2017. Therefore its support to traded goods sectors needs to be delivered in ways that do not distort prices.
Targeted and limited direct benefit transfers to farmers, along with measures to improve productivity and marketing are all steps in the right direction. Allowing stable exports in organic and processed foods will also help farmers get better price realisation. It will not be inflationary since world food prices are also likely to remain soft.
Despite the Central and State governments provinding over 60 different types of subsidies to textile exporters, there are complaints about delays and distortions. The government should therefore, in consultation with exporters, shift to other supporting policies some of which can specially benefit textiles and other export intensive sectors. These include export infrastructure, logistics, skilling, technology development and ease of doing business some of which is happening.
General supply-side measures must focus on building capacity to participate in higher growth and on reducing costs. The current collapse in inflation is partly due to the success of such measures, in addition to the softening of oil prices. For example, GST has reduced transportation and logistics costs for companies, as well as many indirect tax rates.
Demand side policies
If supply-side polices successfully reduce costs and inflation, macroeconomic policy can afford to be stimulatory. Indian catch-up growth was unnecessarily volatile because neglect of critical bottlenecks made supply and external shocks relatively large, while policy rather than smoothing shocks tended to over-react to them.
Inappropriate policies arose from incorrect macroeconomic stabilisation understanding. In a populous country with underemployed labour, sectoral bottlenecks and price shocks can cause inflation even without aggregate excess demand. On the Indian growth path, therefore, as long as focused sectoral and general supply-side measures improve exports and reduce costs, macroeconomic policies have space to stimulate growth and the absorption of under-employed labour. Such stimulus can be effective.
The current structural view on fiscal consolidation as well as pressure from foreign investors reduces fiscal space, puts the onus on monetary policy to stimulate the economy in the current slowdown. As tax collections fall in a slowdown, a mild rise in fiscal deficits is an automatic stabiliser and should be welcomed.
Restore old GST norms on inverted duty
The Goods and Service Tax law was introduced with the intent to remove cascading effects of various taxes and to have free flow of input tax credits. True to its intent, enabling provisions were also incorporated in the GST legislation wherein refund of accumulated credit on account of inverted duty is permitted unlike Excise Duty/Service Tax legislations. Inverted duty structure means the scenario wherein the inward supplies are being taxed at a higher rate than the outward supplies. Such imbalancing tax structure results into accumulation of tax credits in the hands of the tax payers with no clear foreseen usage. Such issues of the erstwhile regime have been addressed in GST legislation and the manner of determination of eligible amount of refund on account of inverted duty structure has been prescribed.
The refund of accumulated credit will be granted once it is established that the goods or services are covered under inverted duty structure. The intention of the legislation is to grant the refund of accumulated credit resulting on account of procurement of inputs and input services only. However, in April 2018, the relevant provision for granting the inverted duty refund were tweaked to restrict the scope of refund to inputs only and not to input services. Further, in June 2018, the said amendment was given retrospective effect i.e. from the date of implementation of GST, July 1, 2017. The rationale given for restricting the scope of refund is the legislative intent to grant the refund for inputs used in outward supplies only. These amendments have resulted in inconsistency between general principles provided in the GST legislations read with the manner of determination of refund as prescribed.
In view of the retrospective amendment, several assesses who had received the refund of input services were served with notices to return the amount of refund along with interest, resulting in litigation. Also tweaking the provision with retrospective effect has created a lot of financial hardships to taxpayers with blockage of funds as GST credit. Restricting the refund for input services in such occasions will lead to higher costs which ultimately would be borne by consumers at large.
Various representations have been filed to restore the earlier practice of granting refund of input services.
However if we strictly abide by the legal provisions, it appears that draftsman have erred in amending the rules as the legal provision nowhere distinguish between inputs and input services. Further, differential treatment have been accorded in case of refund on account of exports and inverted duty structure even though parent provisions are same for both the refunds.
Such restrictions have direct impact on the Make in India initiatives and ease of doing business since the taxpayer falling under lower tax brackets will be piled-up with ever increasing GST credits.
The ideal solution is to restore the earlier provisions. However, as an interim measure the government should provide the refund on those input services which have direct nexus with the manufacturing activity like labour, job-work etc. In the era of ease of doing business, it is time to reckon that services are inevitable part of manufacturing activity.
Trade and industry at this juncture need encouragement from the government through efficient and competent tax policies resulting into overall development of the country.
With less than one month left in the current fiscal, banks will have to work overtime to meet the MUDRA loan lending target of Rs. 3 lakh crore, as only about Rs. 2 lakh crore has been disbursed till February 22.
As on February 22, the total loans disbursed under the Micro Units Development and Refinance Agency Ltd. (MUDRA) scheme stood at Rs. 2,02,668.9 crore versus the sanctioned amount of Rs. 2,10,759.51 crore, said government data. Data from the Finance Ministry said more than 3.89 crore MUDRA loans have been sanctioned so far this fiscal.
The dark continent has an almost ‘unlimited market,’ says David Rasquinha
Indian exporters need to increasingly tap African countries that have an almost “unlimited market,” said David Rasquinha, MD, Export Import Bank of India.
Pointing out that expanding geographical range and product diversification were critical for Indian exporters, he said in 2018-19, exports were expected to surpass the $304-billion figure of 2017-18. Delivering the keynote address at an international trade conclave arranged by the Bengal Chamber of Commerce and Industry here, on Friday, he also highlighted the rising concerns of the Indian textile exporters and the challenges being faced by exporters.
Referring to Africa, he said that India’s exports to this continent had increased from 7.5% in 2009-10 to 8% in 2017-18. Of the 54 African countries, there was significant trade with 47. Many of these countries ranked high in terms of ease of business.
Facing competition
On the issue of the competition being faced by Indian textile exporters from Bangladesh and Vietnam, he highlighted the need to scale up business to combat cost pressures.
“We grow cotton, others do not. We have to leverage our strengths,” he said, adding India also needed to move towards textile blends.
On the changing role of finance, he said that the banking sector’s health was now improving through various measures, especially through the Insolvency and Bankruptcy Code. He shared his concern on LIBOR as a benchmark rate, noting that its trustworthiness had now come under the scanner.
While a new benchmark dollar interest rate had been created (Secured Overnight Financing Rate), the change from LIBOR is not easy as it is tied to all kinds of financial instruments
He said that the bank may clock 10% growth, with its business likely to touch Rs. 1 lakh crore this fiscal.
January figures totalled Rs. 1.02 lakh cr.
Gross Goods and Services Tax (GST) revenue collection in February stood at Rs. 97,247 crore, down from the Rs. 1.02 lakh crore collected in January.
The February 2019 figure is, however, 13% higher than what it was in February 2018.
“Total gross GST revenue collected in the month of February, 2019 is Rs. 97,247 crore of which CGST is Rs. 17,626 crore, SGST is Rs. 24,192 crore, IGST is Rs. 46,953 crore and cess is Rs. 8,476 crore,” the government said in a statement on Friday.
The total number of GSTR 3B returns filed for the month of January up to February 28, 2019 is 73.48 lakh.
“While the monthly collection is a tad lower than last month, it is more or less same as average monthly collection of 2018-19,” Pratik Jain, partner and leader, indirect tax, PwC India, said.
“We have seen that collection of over Rs. 1 lakh crore in a month has typically come in the last month of the quarter only, so a slight reduction doesn’t seem to be a cause for worry,” he added.
Plan for next year
That said, Mr. Jain did point out that the real question should be how the government plans to achieve next year’s revenue target, which is 20% higher than the target for the current year, especially since the GST Council doesn’t have the room to increase tax rates.
Index expands on sharp, accelerated rise in sales: survey
Manufacturing activity expanded to a 14-month high of 54.3 in February, driven by increases in sales, output, and employment, according to a private sector survey.
The Nikkei India Manufacturing Purchasing Managers’ Index registered a strong reading of 53.9 in January as well. A reading over 50 denotes an expansion in activity and one below 50 shows a contraction.
“The health of the Indian manufacturing sector strengthened further in February, with a sharp and accelerated increase in sales, boosting growth of output and employment,” the report said. “At 54.3 in February, up from 53.9 in January, the Nikkei India Manufacturing Purchasing Managers’ Index reached a 14-month high.
“The latest figure was consistent with a robust improvement in business conditions that was stronger than seen on average over the 14-year survey history,” the report added.
New work orders
The report said that supportive government policies and strengthening demand conditions resulted in an expansion in the inflow of new work orders. The increase, it said, was the sixteenth in as many months and the most pronounced since October 2016.
“The Indian manufacturing sector made further progress midway through the final quarter of FY18, building on the accelerated upturn noted in January,” Pollyanna De Lima, principal economist at IHS Markit and author of the report, said.
Canada, US serve counter-notification to India
India’s minimum support price (MSP) programme for pulses has come under greater scrutiny at the World Trade Organization (WTO) with the US, Canada and Australia serving it a formal counter-notification, alleging that the subsidy involved was much higher than the permitted cap. The EU, New Zealand, Ukraine and Paraguay also joined the chorus against the country.
Defending itself at the agriculture committee meeting this week in Geneva, India said the calculations of MSP made by the US and Canada were incorrect and stressed that its price support programme for pulses was only to ensure nutrition supply for 195 million poor people.
The five pulses covered under MSP are chickpeas, pigeon peas, black matpe, mung beans and lentils.
“Contrary to India’s reported number of 1.5 per cent of total value of production, Canada and the US believed India’s MPS (market price support) for pulses was actually between 31-85 per cent, vastly exceeding its de minimislimits (cap) of 10 per cent of the total value of production,” a Geneva-based trade official said.
In case it is established that India’s ‘trade distorting support’ exceeds the cap, it would be forced to discontinue the support programmes, failing which it may have to pay penalties. Although India and a number of developing countries have been demanding that food procurement subsidies should not be capped, WTO members are yet to arrive at a “permanent solution” to the problem.
India has earlier been served three counter-notifications targeting wheat, rice, sugar and cotton. The US and Canada also claimed there are a set of specific methodology issues in India’s notifications that are inconsistent with WTO regulations. India reported support levels in dollars rather than rupees, included only volumes actually purchased as eligible production for the purpose of determining support levels, and failed to report total value of production, it said.
In addition, India only provided the aggregate MPS support for five pulses products without breaking down figures according to each product, it added.
Nutrition supply
In response, India said that the US and Canada’s counter-notification, co-sponsored by Australia, was based on incomplete and misleading information. “India said its minimum market price support for pulses … was merely to ensure nutrition supply for 195 million poor people and is a very small quantity. It insisted that eligible production is only the volume actually purchased by the government,” the trade official said.
With respect to the issue of currency, India repeated that there is no obligation in the WTO in terms of the currency to be used and many members chose to report in US dollars as India did. If the complaining members are not satisfied with India’s explanations, the matter could be dragged to a dispute settlement panel.
Wage-gain to mainly benefit highly-skilled workers
Increase in exports can not only result in higher wages in India, but also better jobs — including more formal jobs for youth and women, according to a joint report by the World Bank and the International Labour Organisation.
The report, titled “Exports to Jobs: Boosting the Gains from Trade in South Asia”, said that increasing exports would boost average wages.
The biggest beneficiaries of the wage gains would be the high-skilled, urban, more experienced, and mainly male workers. For low-skilled workers, the shift would result in an increase in formal jobs.
Policies in place
“Our research shows exports can improve the performance of local labour markets. Policies need to be put in place to increase exports in South Asia, while ensuring that the benefits of higher exports are shared more broadly,” said Gladys Lopez-Acevedo, World Bank’s lead economist. The report analyses the effect on local employment and wages of changes in exports by combining disaggregated data from household-level or worker-level surveys with trade data from India and Sri Lanka.
The approach builds on a new wave of research looking at how globalisation might contribute to local jobs and wages.
However, unlike previous studies, it focusses on exports, said the statement.
“Economists and policy makers need a better understanding of how exactly globalisation affects both workers and national labour markets,” said Daniel Samaan, Senior Economist, ILO Research Department.
In 2018-19 fiscal, ending March 2019, Indian economy is estimated to have grown 7 per cent, lower than 7.2 per cent in 2017-18
Indian economy is expected to grow at 7.3 per cent in calendar year 2019 and 2020, and the government spending announced ahead of elections this year which will support near-term growth, Moody’s said on Friday.
The United States (US)-based rating agency said that the country is less exposed to a slowdown in global manufacturing trade growth than other major Asian economies and emerging markets and is poised to grow at a relatively stable pace in the two years.
“We expect India’s economy to grow around 7.3 per cent in both years (2019, 2020),” Moody’s said in its quarterly Global Macro Outlook for 2019 and 2020.
Moody’s growth estimates in based on calendar year. India, however, measures its economic growth on the basis of fiscal year (April-March).
In 2018-19 fiscal, ending March 2019, Indian economy is estimated to have grown 7 per cent, lower than 7.2 per cent in 2017-18.
Moody’s said the announcement in Interim Budget 2019-20 on direct cash transfer programme for farmers and the middle-class tax relief measures will contribute a fiscal stimulus of about 0.45 per cent of the Gross Domestic Product (GDP).
“These measures will support growth through consumption over the near term, albeit at a fiscal cost. In India, government spending announced ahead of elections this year will support near-term growth,” Moody’s said.
It said the Reserve Bank of India (RBI) is likely to be able to maintain their current monetary policy stance after some tightening last year.
The RBI cut its benchmark policy rate in February and changed the policy stance to “neutral” from “calibrated tightening”. Inflation measures have steadily declined since the middle of 2018.
On banking sector, Moody’s said, although the overall strength of the system is improving, it remains a constraint on the economy.
In February 2019, the government provided further capital infusions to public sector banks. These measures, combined with the application of the Prompt Corrective Action (PCA) framework, which requires timely recognition of bad loans, and resolution of bad loans through the Insolvency and Bankruptcy Code, are helping to address solvency and asset quality challenges.
“However, a complete turnaround of the banking system requires more time amid slower-than-expected resolution of legacy problem loans,” it said.
Non-performing assets declined to 10.8 per cent in September 2018 from a peak of 11.5 per cent in March 2018. The central bank expects this ratio to improve further to 10.3 per cent in March 2019.
Moody’s said, with range-bound oil prices, export growth has outpaced import growth for the last two years. Fiscal spending on infrastructure and the rural economy should continue to support domestic activity.
