Thursday, 14 September 2017

Indian Economy Losing Steam Amid Soft IIP Numbers and Rising Inflation

The challenges for Indian economy seems to be mounting as data on the Index of Industrial Production (IIP) and consumer price index (CPI)-based inflation comes as bad news for the Narendra Modi government, with a clearer evidence of slowdown after growth of gross domestic product (GDP) crashed to its lowest last week.

The IIP data shows that it has grown by only 1.2 per cent, while it grew at 4.5 per cent in the same month last year, signaling that the industrial activity and manufacturing are still reeling under the impact of demonetisation and Goods and Services Tax (GST).

Adding to the woes, August's consumer price index inflation shot up to a five-month high at 3.36 per cent from 2.36 per cent in July, dampening chances of a rate cut by the central bank. According to economists, rise in inflation for two straight months has reduced the chances of another rate cut by the RBI in a policy review next month, which has a central inflation target of 4 per cent. Last month, the RBI had cut its key lending rate by 25 basis points to 6 per cent in view of softening inflation.

The GST rollout has caused many problems within the manufacturing sector, and reports suggest that the fall in IIP in June, mostly part of the formal economy, was because of pre-GST stocking. But the continued low rate of IIP in July showed that industrial recovery impacted by GST and demonetisation within eight months of each other is suffering under the weight of both the decisions.

However, the silver lining is that economists expect industrial recovery to gain momentum as the GST stabilises. 

Considering the inflation numbers, the GST has also made some services, such as health, transportation and communication, recreation and amusement, inflationary. Further, a surge in house rent allowance (HRA) for central government employees also pushed up inflation in rent to 5.58 per cent in August from 4.98 per cent in the previous month. Even when volatile inflation in food and petroleum is taken out, the resultant core inflation rose to 4.5 per cent in August, from 3.9 per cent in the previous month. However, economists are not perceiving inflation as a threat and expect it to remain in the targeted 4 per cent range. 
Latin Manharlal Group

Thursday, 31 August 2017

Ease of Doing Business: Still a Long Way To Go

The efforts taken by National Democratic Alliance (NDA) to ease the regulatory environment notwithstanding, the perception of most business enterprises is that little has changed on the ground.

This comes as a wake-up call to the government and a reminder that the legacy of red tape is far more tough to undo than what has been thought so far. The study also reveals that the experience of regulatory reform has not been uniform across the country.

A survey by NITI Aayog and Mumbai based think tank IDFC institute of formal Indian manufacturing firms, has found that, as of the 2016 reforms by the NDA government, factory-owners largely do not feel things had changed excessively.
The results exhibited that for a majority of respondents, parameters such as setting up a business, land and construction, environment, labour, water and sanitation, taxes, and access to finance remained the same compared with a year ago; on legal matters, they reported that things had deteriorated. The survey was conducted in 2016. Last year, the World Bank’s Ease of Doing Business Ranking placed India at a lowly 130 out of 150 countries.
The Niti study has surveyed over 3,000 manufacturing firms all over the country, while the World Bank survey is focused mainly on Delhi and Mumbai, and involves surveying expert opinion to form global rankings.
According to the Niti survey, on an average it took enterprises about two years to resolve a legal dispute and there is wide disparity across states. On an average, companies witnessed around 46 hours of power shortage in a typical month. It took firms 118 days to set up a business. The World Bank's Doing Business survey shows that it takes 26 days to set up a business but this is restricted to Delhi and Mumbai.
Further, the awareness among the firms of government’s actions to improve the business climate is surprisingly low. As per the survey, only 20 per cent of the firms surveyed informed about using single-window systems for setting up a business. A majority of well-established firms nearly 59 per cent didn’t even know of this tool, which greatly eases compliance burden.

However, the study suggests that in labour-intensive sectors like textile, apparel and footwear, more flexible labour laws can aid in scaling up to meet order demand. Improved information to entrepreneurs about “single-window” approvals in states can improve matters. As would better availability of power and finance, especially in poorer states. Undoubtedly, the ease of doing business can be much improved.
Latin Manharlal Group

Tuesday, 15 August 2017

Uncertain Fiscal Outlook to Undermine India’s Growth Hopes

There seems to be trouble brewing for Asia’s third biggest economy as fiscal slippages could be a drag on the country in the year to March 2018, with outlook for current financial year turning more somber.
According to Economic Survey Part-II released, the country is facing an uncertain fiscal outlook going forward and this would make it difficult in achieving higher end of the 6.75-7.5 per cent GDP growth estimated earlier.

The downside risks to growth and fiscal outlook of the Indian economy are piling up in the form of deflationary impulses like farm loan waivers, stressed farm revenues, as non-cereal food prices have declined and declining profitability in the power and telecommunication sectors, further worsening the Twin Balance Sheet (TBS) problem. However, it remains upbeat on meeting the fiscal deficit target, according to the second part of Economic Survey.

The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.

Owing to the gradual fiscal consolidation path chalked out in Union Budget for 2017-18, the fiscal deficit is expected to come down to 3.2 per cent of GDP during 2017-2018. After reaching this milestone, the fiscal deficit target of 3 per cent of GDP under the FRBM framework is likely to be achieved in 2018-19.

The mid-year survey also called for interest rates to be lowered even further as India struggles with subdued private sector investment and a banking sector coping with rising non-performing assets. 

Moving ahead, the government needs to convince the central bank to slash rates further, by pushing policy measures to keep inflation under control. With inflation dipping to 1.5 per cent in June, weak demand has been a serious concern. According to the repot, inflation is projected to remain below the medium-term target of 4 per cent.

Latin Manharlal Group

Monday, 31 July 2017

Uptick in Business Confidence Lifts India’s Economic Outlook

With Indian economic activity gathering pace this year, India’s business confidence has improved underpinning the hope that the reform initiatives of the government would unravel a host of investment opportunities for firms going forward.

According to the Grant Thornton International Business Report (IBR) survey, India’s ranking has surged from 4th to 2nd position on the optimism index in the second quarter of 2017.

The uptick in business outlook has been attributed to the continued reforms coupled with expectations of higher economic growth. The implementation of Goods and Service Tax (GST) has further contributed to optimism. GST is expected to contribute to productivity gains and a higher GDP growth by improving the ease of doing business, unifying the national market and boosting India’s attractiveness as a foreign investment destination.

According to the report, 94 per cent Indian businesses have faith in India's economic growth story. India also topped the chart on the ranking for revenue expectations with 78 per cent of the businesses in the country expecting an increase.

Meanwhile, on profitability index, 69 per cent of the respondents expect higher profitability, thus, bringing India on the 2nd rank on the chart from 6th position in the last quarter.

Strong reform measures and political stability has led to improved business sentiment towards India. The trend is further expected to continue in the longer-term, filtering through to corporate earnings.

India continues to stand out as the one economy which has huge potential to continue to grow and this is reflected in the survey where Indian businesses are most optimistic and high on expectations of increasing revenue, employment, profitability.

While India continues to rise on the optimism index, China is still lagging with only 48 per cent businesses displaying confidence in its economic growth for the second consecutive quarter.

Globally, companies are positive on business prospects with an all-time quarterly high of 51 per cent in Q2, making it the fifth consecutive quarter of optimism. Companies in the US, European Union and China are more confident with 81 per cent, 50 per cent and 48 per cent, respectively, businesses optimistic on future prospects.

Latin Manharlal Group

Thursday, 13 July 2017

Cooling Inflation Bolsters Rate Cut Hopes

India’s consumer price inflation has eased to its slowest pace in more than five years, raising demands for the interest rate cut by the Reserve Bank of India (RBI) at its policy meet scheduled in August, in order to stimulate growth in Asia’s third biggest economy.

According to Central Statistics Office (CSO) data released, consumer inflation eased to a record low of 1.53 per cent in June from 2.18 per cent in May. It was 5.77 per cent during the corresponding period last year.

With inflation number below the RBI’s mid-term target of 4 per cent for the past eight months, industry participants and the government are batting for a cut in interest rates to support economic expansion. The central bank now expects retail inflation to come in a 2.0-3.5 per cent range for the first half of FY 18 and 3.5-4.5 per cent in the second half, down from 4.5 per cent and 5.0 per cent, respectively.

Deflation in vegetables and pulses continues to bring down the headline numbers as food and beverage price index, which accounts for 45 per cent of the consumer price index basket, contracted 1.17 per cent in June. Vegetables prices slipped 16.53 per cent during the reporting month from last year, while price of pulses declined nearly 22 per cent. Analysts expect these prices to remain subdued for few more months aided by an excess supply, good monsoons and low prices globally.

On the other hand, industrial output rose 1.7 per cent in May after rising 3.1 per cent in April owing to weaker performances in manufacturing, mining and power generation. The tepid factory output data could further strengthen the case for RBI rate cut in August to support India's economy, which grew 6.1 per cent in the January-March quarter, its weakest pace in more than two years.

While the recent data may put pressure on RBI to consider a token 25 basis point rate-cut, it is not a given. Monsoons, HRA increase under the Seventh Pay Commission, temporary impact of GST, base effect trickling in, and fiscal risks coming from farm loan waivers by States can still exert upside pressure on inflation in the second half of this fiscal.

Latin Manharlal Group

Wednesday, 28 June 2017

GST Rollout to Support India’s Growth Story

After a long wait of 17 years, the goods and services tax (GST) is all set to become a reality from the midnight of June 30.  GST is expected to provide the much-needed stimulant for the economic growth in India by transforming the existing base of indirect taxation towards the free flow of goods and services.
GST is the indirect tax reform that will replace several taxes levied by the central and state governments and change India into a single common market with a unified tax structure. It was introduced as the Constitution (122nd Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill. Under GST umbrella, goods and services will be taxed at 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent.
GST, a uniform, indirect tax regime, will no doubt benefit the industrial class by improving the ease of doing business. Integration of current multiple taxes into single GST will reduce cost of tax compliance and transaction cost. GST will also remove cascading effect of taxes imbedded in cost of production of goods and services.

According to economists, lower GST rates may lead to a decline in inflation, however, the economic growth may not improve significantly in the short term even though it will benefit both India Inc and the government in the medium term. However, GST, which will be rolled out in July, will help raise India's medium-term growth to above 8 per cent, as it will enhance production and the movement of goods and services across Indian states.

With the implementation of GST, the flow of Foreign Direct Investments (FDI) may rise as the existing multiple tax laws are one of the reasons foreign companies are wary of coming to India.

In addition, India’s overall revenue is also expected to shoot up by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth.

GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production that incudes land labour and capital.

The introduction of the Goods and Services Tax will be a very noteworthy step in the field of indirect tax reforms in India. The GST, because of its transparent character, will be easier to administer. The proposed taxation system holds great promise in terms of sustaining growth for the Indian economy.

Latin Manharlal Group

Wednesday, 14 June 2017

Record Low Inflation in May Spurs Rate Cut Hopes by RBI

India’s retail inflation gauge slumped further in May, hitting a record low amid a sharp drop in kitchen staples, leaving lingering doubts about whether the Reserve Bank of India (RBI) tightened its monetary policy stance too early.

According to the data released by the statistics office, consumer inflation, the benchmark price gauge of the RBI, eased to a record low of 2.18 per cent in May from 2.99 per cent in April. It was 5.76 per cent during the corresponding period last year.

The data would confirm expectations that inflation is running well below the central bank's estimates, adding pressure on the RBI to reduce interest rates during its next policy meeting in August to boost economic growth.

The RBI last week kept the benchmark repurchase rate unchanged at 6.25 per cent in a policy review and slashed its inflation forecasts, acknowledging that price pressures were weaker-than-anticipated, but declined to ease its 'neutral' policy stance amid concerns that inflation may rebound and move close to its 4 per cent medium-term target by the end of the year.

Asia’s third-largest economy is facing a decline in inflation amid cooling food prices. The consumer food price index declined 1.05 per cent in May, compared to a year ago period, led by an almost 20 per cent fall in the prices of pulses and products. Price of vegetables too fell 13.4 per cent from a year ago.

Further, India's wholesale prices also cooled in May. WPI inflation in May was 2.17 per cent compared with 3.85 per cent in April. Similar to retail inflation, the drop in the wholesale inflation is attributed to easing food prices.

Going forward, a good monsoon is expected to keep a lid on food prices and overall inflation, which may force RBI to shift its attention to growth. India's GDP growth slipped to 6.1 per cent in quarter ended March, the lowest in more than two years, as the economy struggled with the effects of November's demonetisation. 
Latin Manharlal