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CRISIL IndiaInsights
Mar – Apr 2021
The policy support imperative
Fiscal 2021 has been a challenging year for the Indian economy, which was already experiencing a slowdown before the pandemic. Though there has been some pick-up in recent months, recovery is weak and uneven. The county’s gross domestic product (GDP) is expected to contract 8% by end-fiscal. At the same time, monetary policy has begun normalising and some tightness in domestic financial conditions is inevitable.
Against this backdrop, policy support remains critical, apart from action in the external environment. This fiscal, policy response to the pandemic has been more on damage control and providing support to the economy. In fiscal 2022, though, the government is expected to normalise some of the extraordinary or unconventional policy moves, while trying to ensure smooth revival in growth. Some of its biggest challenges ahead will be: broad-basing growth to services and labour-intensive manufacturing sectors and ensuring financial conditions stay supportive.
CRISIL forecasts India’s GDP growth to rebound to 11% in fiscal 2022. In reality, though the economy will end up only 2% above the fiscal 2020 level, it will a sharp 10% lower compared with its trend level. Fiscal 2022 is also seen emerging as a story of two halves. The first half will be characterised by a base effect-driven recovery amid the challenge associated with the resurgence in Covid-19 infections. But the second half should see a more broad-based growth, as vaccine rollout and herd immunity support sectors that are lagging. These include most of the services sectors, especially contact-based travel, tourism, and entertainment. Also, stronger global growth should be supportive for India’s exports, to some extent.
We expect the Reserve Bank of India (RBI) to maintain status quo on interest rates in the upcoming monetary policy and continue its accommodative stance. GDP growth would average 6.3% between fiscals 2023 and 2025. This is higher than the 5.8% average in the three fiscals prior but lower than the 6.7% average growth seen in the decade preceding the pandemic. Even with that, the economy is expected to face a permanent GDP loss of ~11% relative to the pre-Covid-19 trend in the next three fiscals.
Still, India will continue to grow faster than the world as a whole. Factors that support this are: a stretched fiscal deficit glide path and expectation that additional fiscal space – estimated at Rs 20-25 lakh crore over the next five years – will be used for capex; promising set of reforms that have the potential to create a platform for growth in the medium term; deleveraging by corporates over the past few years improving the appetite for investment; and more support from global GDP and trade growth.
FY20 FY21F FY22F
GDP (%, y-o-y) 4.0 -8.0 11.0
CPI inflation (%, average) 4.8 6.4 5
Fiscal deficit (% of GDP) 4.6 9.5^ 6.8^^
10-year G-sec yield (%, March) 6.2 6.2 6.5
Current account deficit (% of GDP) -0.9 1.8 -1.4
Rs per $ (March) 74.4 73.5 75.0
NSO estimate, ^Budget estimate, ^^Revised estimate Source: NSO, RBI, Ministry of Finance, CRISIL Research
India will grow faster than the world
Note: Global outlook is for calendar year (FY21 = 2020)
Source: S&P Global, November 2020; Central Statistics Office, CRISIL 4
-8 11
6.1 6.3 6.4
2.8
-4
5
4 3.6 3.6
FY20 FY21 FY22 FY23 FY24 FY25
GDP,
% y-o-y
India World
2
GDP
Scarred, but recovering
● India's GDP grew 0.4% on-year in Q3 of fiscal 2021, reflecting sustained improvement from 24.4% Q1 and 7.3% Q2 contractions
● The better-than-expected GDP estimate suggests: rapid recovery, supported by learning to live with the virus attitude, pent-up demand, better rural income, and higher government capex; however, initial estimates do not fully capture the performance of the unorganised sector
● The National Statistical Office's (NSO) estimates place the full- year fiscal 2021 GDP contraction at 8%
Note: Q4 growth rates are implicit
Source: Ministry of Statistics and Programme Implementation, CEIC, CRISIL
Industrial Production
Skidding a touch● Index of Industrial Production (IIP) fell fell 1.6% in January 2021, compared with a 1.6% rise in December
● Drop in January output came from manufacturing and mining
● Both, consumer durables and non-durables saw steep declines
● However, manufacturing is performing better than services, with the latter lagging due to sectors such as trade, hotels, transportation, and communication
● CRISIL believes manufacturing will recover faster in the next
fiscal, while services (especially contact based) will lag Source: NSO, CRISIL
Inflation
Base lift, core worry
● Consumer Price Index (CPI)-linked inflation rose again to 5.0% in February from 4.1% in January, helped by a low base
● Both fuel and core inflation saw significant sequential rise
● Zooming to 4.2% in February, Wholesale Price Index (WPI)-linked inflation more than doubled from 2.0% in January
● With inflation back in the target range of 2-6% at the moment, it may be a while before it is firmly down
● CRISIL forecasts CPI inflation to average 5.0% in fiscal 2022 Source: NSO, CRISIL
Interest Rate
Yields take wing● Yield on the 10-year government security (G-sec) averaged 6.08%
in February, 16 basis points higher on-month
● High central government borrowing budgeted for fiscal 2022 dented investor sentiment. The central bank's refusal to accept bids demanding higher yields, and absence of explicit calendar for open market operations added to woes
● Rising crude oil prices and United States (US) Treasury yields accelerated outflows by foreign portfolio investors
● CRISIL expects the 10-year G-sec to rise to 6.5% by March 2022
from 6.2% in March 2021 Source: Clearing Corporation of India Ltd, CRISIL -50
-30 -10 10 30
Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Demand-side GDP components (%, on-year)
Private consumption Fixed investment Government consumption
3.8
-0.8
-12.2 3.8
-1.4
-13.6
FY19 FY20 FY21
(Apr-Jan)
FY19 FY20 FY21
(Apr-Jan)
General Manufacturing
Y-o-Y (%)
3.4
4.8
6.2
4.3
1.7
0.6
FY19 FY20 FY21
(Apr-Feb)
FY19 FY20 FY21
(Apr-Feb)
CPI WPI
Y-o-Y (%)
6.5
5.0
4.1
7.5
6.2 6.1
Mar-19 Mar-20 Feb-21 Mar-19 Mar-20 Feb-21
1-yr G-sec 10-yr G-sec
Average (%)
3
Rupee
Mild appreciation
● The rupee appreciated 0.5% to 72.8/$ on average in February
● The Covid-19 vaccine rollout, steady momentum in economic activity, and continued foreign portfolio investments supported the rupee
● Rise in crude price and imports, and appreciation of the dollar index put downside pressure
● CRISIL expects the rupee to average 73.5/$ fiscal-end and 75/$
next fiscal-end
Source: RBI, CRISIL
Trade
Exports create drag
● Merchandise exports slowed to 0.7% on-year in February from 6.2% previous month, on decline in major manufacturing exports
● Import growth rose to 7% from 2%, driven by gold and electronic goods
● Manufacturing exports and imports dwindled in February
● Trade deficit stood at $12.6 billion, $1.9 billion lower on-month, but $2.5 billion higher on-year
● CRISIL expects current account surplus at 1.8% of GDP this fiscal, and current account deficit at 1.4% in fiscal 2022
Source: Ministry of Commerce, CRISIL
Global developments
Parameters US UK EA Japan China
GDP (q-o-q, annualised %) Q4-2020 4.0 1.0* -0.7* 12.7 6.5^
CPI inflation (y-o-y %) Jan'21 1.4 0.9 0.9 -0.6 -0.3
Trade balance (national currency, billion) Jan'21 -68.2 1.9 6.3 325.4 51.6#
Policy rate (%) Feb'21 0-0.25 0.10 0.0 -0.1 3.85
Note: *Not annualised, ^y-o-y, #$ billion Source: Statistical bureau, respective countries
● The US finally passed the much-awaited $1.9 trillion fiscal stimulus package. The stimulus is expected to positively impact demand and economic activity in the US and have positive spill-over effects for its trading partners, particularly, Canada, Mexico and China, stated the OECD. CPI rose 0.3 percentage points to 1.7% on-year in February. The lower-than-expected inflation print soothed some concerns about potential higher inflation, fuelled by the huge fiscal stimulus
● In its latest February meeting, the Bank of England maintained its bank rate at 0.1% and the stock of corporate bond purchases at £20 billion. It expects United Kingdom (UK) GDP to fall 4% in Q1 2021, in contrast to earlier expectations of an increase
● Unemployment rate seems to be have stabilised in the euro area (EA). In its latest meeting, the European Central Bank (ECB) left its Pandemic Emergency Purchase Programme unchanged. The ECB has committed to more bond purchases, which will likely support bond prices and keep borrowing costs lower
● The Bank of Japan changed its assessment for the state of the economy in its latest monthly economic report. Though the Japanese economy shows weakness in select sectors, it is showing signs of picking up, particularly in business investments and corporate profits. Private consumption, however, remains weak. The revised upward-looking assessment comes on the heels of positive GDP growth in the last quarter of 2020, driven by increases in exports and private investment
● Momentum in China’s manufacturing activity is slowing down, with the Purchasing Managers' Index declining for the third consecutive month. Chinese economy experienced deflation for the second consecutive month, with the CPI-based inflation dropping 0.2% on-year, slightly up from -0.3% in the previous month
69.5 74.4 72.8 78.5 82.3 88.0
Mar-19 Mar-20 Feb-21 Mar-19 Mar-20 Feb-21
INR/US$ INR/Euro
Period average
9.3
-4.5
-11.9 11.1
-7.3
-22.0
FY19 FY20 FY21
(Apr-Feb)
FY19 FY20 FY21
(Apr-Feb)
Exports Imports
Y-o-Y (%)
Argentina | China | Hong Kong | India | Poland | Singapore | UK | USA | UAE
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Data Summary
Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21
Industrial Production* (%, y-o-y)
General 1.0 4.5 -2.1 1.6 -1.6 -
Mining 1.4 -1.0 -6.7 -4.2 -3.7 -
Manufacturing 0.4 4.5 -2.0 2.1 -2.0 -
Electricity 4.9 11.2 3.5 5.1 5.5 -
Primary Goods -1.5 -3.1 -2.3 -0.1 0.2 -
Capital Goods -1.2 3.2 -7.4 1.5 -9.6 -
Intermediate Goods -0.4 3.2 -2.6 2.2 0.5 -
Infrastructure and Construction Goods 4.0 10.9 1.7 2.7 0.3 -
Consumer Durables 5.3 18.1 -3.4 5.7 -0.2 -
Consumer Non-Durables 2.4 7.3 -1.3 0.5 -6.8 -
Inflation (%, y-o-y)
WPI-All Commodities 1.3 1.3 2.3 2.0 2.0 4.2
WPI-Primary Articles 1.4 2.0 0.7 -3.1 -2.8 1.0
WPI-Manufactured Products 0.6 0.2 1.0 1.4 1.3 0.6
WPI-Fuel & Power -0.1 -1.1 3.6 2.9 2.9 4.5
CRISIL Core Inflation Indicator (CCII) 1.6 1.7 2.5 3.4 3.7 4.7
CPI (General) 7.3 7.6 6.9 4.6 4.1 5.0
Merchandise trade (%, y-o-y)
Exports 6.0 -4.9 -8.4 0.2 6.2 0.7
Imports -19.6 -11.5 -13.3 7.6 2.0 7.0
FOREX Reserves ($ billion)** 542.0 560.7 574.8 580.8 590.2 584.6
Markets##
BSE SENSEX 38068 39614 44150 47751 46286 49100
NIFTY 50 11248 11642 12969 13982 13635 14529
SENSEX P/E 28 28 31 34 32 34
Exchange Rate#
INR/$ 73.5 73.5 74.2 73.6 73.1 72.8
INR/GBP 95.3 95.4 97.9 98.9 99.7 100.8
INR/EURO 86.7 86.5 87.7 89.6 89.0 88.0
INR/ 100 YEN 69.6 69.8 71.1 70.9 70.5 69.1
INR/Chinese Yuan 10.79 10.9 11.2 11.3 11.3 11.3
Interest Rates (%)##
Base rate$ 7.40-9.00 7.40-9.00 7.40-8.80 7.30/8.80 7.30/8.80 7.40-8.80
1-Year GoI Paper@ 3.74 3.56 3.44 3.59 3.89 4.08
10-Year GoI Paper@ 6.00 5.92 5.89 5.93 5.93 6.08
Note: #Monthly averages, ##Month-end, @Semi-annualised, $10 banks, **As on February 26, 2021 Source: RBI, Government of India (GoI), BSE, Central Statistics Office, CRISIL Research
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