Moody’s and the mood of the economy

In 2016-17, India clocked a GDP growth rate of 8.2 per cent. Three budgets later, India’s GDP slid to 6.8 per cent in 2018-19.

Published: 17th November 2019 04:00 AM  |   Last Updated: 17th November 2019 07:39 AM   |  A+A-

Economy crisis

For representational purposes (Express Illustrations)

Imagination, it is often said, is one of the most potent weapons in the war against reality. On Friday, Suresh Angadi, BJP MP from Belgaum in Karnataka, dismissed the clamour about the slowdown in the economy. “Airports are full, trains are full, people are getting married.” Angadi has added to the growing list of counterfactuals — from share cabs growth to box office collections to marriages — to assess the economy.  

Be that as it may, what is the mood of the economy? In 2016-17, India clocked a GDP growth rate of 8.2 per cent. Three budgets later, India’s GDP slid to 6.8 per cent in 2018-19, and in successive quarters India’s GDP slid from 8 per cent in July 2018 to a shocking 5 per cent in the April-June quarter of 2019.

On Wednesday, four economists projected that GDP growth between July and September would be between 4.2 per cent and 4.7 per cent. Effectively, assuming an average of 4.5 per cent, India’s GDP growth for the first half of the year would be around 4.85 per cent. Translated, to clock 6 per cent GDP growth for 2019-20, the economy would need to grow at 7.2 per cent in the rest of the year. The possibility is slim. Already Moody’s had slashed its GDP forecast for the current fiscal to 5.6 per cent. And on Saturday, the National Council for Applied Economic Research projection placed India’s GDP growth in 2019-20 at 4.9 per cent. 

It is not just the GDP forecasts which spell gloom. Contraction in indirect tax collections and muted growth in direct tax collections —  as against targeted growth of 18-plus per cent — suggest lower revenues and slippage in fiscal deficit target. 

Earlier this week, D K Joshi, Chief Economist at Crisil, tweeted a spell-all slide on India’s economy. Data shows growth is sliding despite lower policy rates, lower inflation, benign crude prices and 3-plus per cent global GDP growth. Visibly the economy has migrated from retrenchment of investment to demand retrenchment. 

The RBI’s survey shows consumer confidence at a six-year low. This is validated by data on sales across sectors and in surveys and quarterly GDP data on private consumption expenditure for durables and, worryingly, non-durables — and an NSO study, leaked and declared withdrawn, shows rural monthly per capita expenditure dropped for the first time in several decades. 

The government has ushered in measures — before and after the 5 per cent bombshell. These include easing of the insolvency process, packages for real estate, exports and MSMEs and the big bang corporate tax rate cut. Yes, policy rates have been slashed to 5.15 per cent, but the conundrum is that neither lending rates nor GOI 10-year bond rates have followed suit. 

Non-food credit is down — for MSMEs, services, and priority sector. Private investment has slid to new lows — government borrowing has crowded out ability and poor capacity utilisation has wrenched away incentive to invest. Suffice to say, the measures are stranded between the evergreen lead and lag explanation and the cliché of too little too late. 

The monetary policy is in a trough. Room for fiscal stimulus is constrained by rising expenditure. And then there is the spectre of new NPAs — as power companies struggle with low demand and poor payment, real-estate companies with unfinished projects and telecom companies with a demand of over `1 lakh crore from the government.

For some time now, a unique phenomenon is haunting the economy — stranded money. For instance State Electricity Boards owe power companies `80,535 crore. And the list is long — dues to affordable housing lenders, to road construction companies, state government contracts and so on. In the last 15 months, NBFCs with balance sheets totalling `2 lakh crore went bust. There is no solution yet. Over 2,000 operational creditors are in the queue to recover dues from insolvent entities. Yes, the new ruling has cleared the way for banks, but the consequence of unsecured and operational creditors, including vendors left in the lurch, could well visit the financial markets.

Lessons for the future are embedded in the past. In November 2017, international rating agency Moody’s upgraded India’s rating “from Baa2 from Baa3” and changed the outlook on the rating to stable from positive. The government welcomed it as “a recognition and endorsement of all the reforms of the last few years.” The upgrade came with its share of ifs and buts, and a caveat. Moody’s cautioned that “Much remains to be done” and listed as expectations a laundry list of reforms. 

That was not to be. On November 7, 2019, Moody’s said “the prospects for effective implementation of such reforms to have diminished since its upgrade of India’s sovereign rating in 2017,” and changed India’s ratings to negative from stable while retaining Baa2 status. Moody’s said the rating “reflects increasing risks that economic growth will remain materially lower than in the past” unless “reforms are advanced to directly reduce restrictions on the productivity of labour and land, stimulate private sector investment, and sustainably strengthen the financial sector.” Frequently, crisis is about what was not done in good times.

Shankkar Aiyar

Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India


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