India economy went through challenging phases in 2017: CARE Ratings
For the first half of the year, growth has come in lower at 6% compared with 7.7% in H1-FY17. There was only one sector, trade, transport, hotels etc, which registered higher growth in H1-FY18 at 10.5% compared with 8.3% last year, the rating agency said.
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According to the rating agency, while GST was the highlight from the policy perspective, the fall out of the same on other economic variables are open for discussion.
Against this background, the agency, however, presented the overall state of the economy in the following way:
GDP growth
For the first half of the year, growth has come in lower at 6% compared with 7.7% in H1-FY17. There was only one sector, trade, transport, hotels etc, which registered higher growth in H1-FY18 at 10.5% compared with 8.3% last year. Further only three other sectors witnessed growth of above 5% during this period: public administration etc., electricity and finance, real estate etc. Our projection for the year is 6.7-6.8% based on the assumption of significant acceleration in Q3 and Q4.
Gross fixed capital formation
The investment rate measured as the ratio of gross fixed capital formation to GDP at current prices was further down to 26.9% from 28.1% indicating that corporates have not been investing in capital creation. Private investment has yet to pick up which will be critical for accelerating the overall investment rate. We do not expect any change in this number which will remain at 27% for the year.
Industrial growth
The overall performance was disappointing as a largely favourable monsoon should ideally have led to greater demand and hence production. Also the restocking following GST should have added to production numbers. But, growth in first 7 months was 2.5% (5.5%). Within industry, mining was the only sector to witness higher growth. Manufacturing and electricity sector output was lower.
The use based classification reveals that barring non-durable consumer goods, all other sectors witnessed lower growth rates. Our forecast for industrial growth for the year is 4-4.5%.
Agriculture
A near normal monsoon should have ideally led to higher growth in agricultural production. The first advance estimate for the kharif crop reveals lower production for rice, coarse cereals, oilseeds, pulses and cotton. Sugarcane is the only crop where production is expected to be higher. Farmers have been challenged by declining prices (at times below the MSP)
However, the area under cultivation of the rabi crop is marginally better till December 22,2017 at 546 lkh hectares (545 lkh ha in Dec’16). We expect overall growth for agriculture, forestry etc. to be around 3% for FY18.
Government finances
As per the latest data released by the government for the period April-November’17, the fiscal deficit is 112% of the target, while the revenue deficit is 152.2% of the budgeted amount. It is expected that the revenue collection could be lower especially for indirect taxes which may not be compensated by higher non-tax revenue in the form of dividend received from PSUs and RBI and higher disinvestment receipts. This has prompted the government to announce an additional borrowing programme of Rs 50,000 cr for the year. Assuming this amount of Rs 50,000 cr is not exceeded nor are additional Tbills issued or retained in March, the fiscal deficit number would go up to 3.5% of GDP for FY18 under ceteris paribus conditions.
Banking sector
The period up to December 8, 2017 reveals that bank deposits at Rs 109.02 lkh cr have grown at a very low rate of 1.3% between April and Dec 8 compared with the growth of13.1% last year. However, it should be remembered that growth was high last year following the sharp increase in deposits following demonetisation. We expect growth to be in the region of 810% by March, 2018.
Bank credit at Rs 80.27 lkh crore had grown at a higher rate of 2.4% this fiscal (0.9% in Apr-Dec’16), leading to a strain on liquidity. Credit growth to manufacturing and services for April-October are negative while that to agriculture and personal loans segment is 7.7%. For the year, we expect growth in credit to match that of deposits, with thrust being on retail sector.
Monetary policy and rates
In the 12 months period ending December 2017, the RBI had lowered rates by 25 bps. The base rate of banks has come down from a range of 9.3-9.65% to 8.85-9.45%, while the MCLR is down from 8.65-9% to 7.65-8.05%. The deposit rate for 1-year deposit has come down from 6.5-7.1% to 6-6.75%. We do not expect any rate action till March 2018.
The 10-years GSec yields had increased during this period from 6.59% to 7.29%. It will remain range-bound around 7.2% till March, 2018 taking guidance from inflation and the Budget.
Corporate debt market
Public issues of debt for the first 8 months of the year were lower at Rs 3,896 cr as against Rs 23,892 cr in 2016. Private placement of debt was virtually unchanged at Rs 4.18 lkh cr (Rs 4.19 lkh cr Apr-Nov’16) during April-November 2017. Total debt issuances are expected to range between Rs 6.5-7 lkh cr for the year.
CPI inflation
CPI inflation increased to 15 month highs in November, 2017 and reached 4.9%. While food inflation was 4.4%, other segments like clothing and footwear (5%), housing (7.4%) and fuel and power (7.9%) witnessed elevated levels of inflation all through the year. CPI inflation will remain around 4.5% for the next 4 months.
External sector
While growth in exports was impressive at 12% for the period April-November 2017, imports too surged by 21.9% leading to a higher trade deficit of $ 100 bn ($ 68 bn last year). We expect exports growth to be around 15% for the year and imports at 22-25% with rising oil prices.
The current account deficit for the first half of the year was higher at 1.8% compared with 0.4% in H1-FY17. However, this has been compensated by the capital account, especially FPI and FDI, which has led to an increase in forex reserves by $ 31.4 bn to $ 401.4 bn. Our expectation is that the CAD will be 1.5% for the full year.
Foreign investment
Both FPI and FDI have been higher in the current year. FPI flows were around $ 32 bn between April-December (latest) compared with $ 4.5 bn last year, of which debt dominated at around $ 24.3 bn. FDI flows for the first 6 months of the year were $ 25.3 bn as against $ 21.6 bn.
Based on these trends we expect FPI to move towards $ 35-37 mark and FDI to $ 50-55 range for the full year.
Exchange rate
The rupee has strengthened significantly in 2017 and on a point to point basis has moved from Rs 68.12/$ to Rs 63.93/$ on Dec 29th. We expect the rupee to remain in range of 64-64.20 by March.
The Sensex has been the most impressive indicator moving from 26,626 in Dec 2016 to 34,056 on 29th December – 28% increase.
