India Economic Growth Slows Sharply On Covid-19

India’s economic growth slowed sharply in the three months to March, partially reflecting the coronavirus-triggered country-wide lockdown that began towards the end of the quarter, official data showed on Friday.

Gross domestic product grew 3.1 percent year-on-year compared to 5.7 percent in the same quarter a year ago, figures from the statistics ministry showed.

The latest growth rate is reportedly the lowest in at least eight years, but was better than the 2.1 percent economists had forecast.

The December quarter growth was revised lower to 4.1 percent from 4.7 percent.

The ministry also lowered its growth figure for the fiscal year 2019-20 to 4.2 percent from 5 percent estimated earlier. The latest growth is reportedly the weakest in 11 years. In the fiscal year 2018-19, the Indian economy had grown 6.1 percent.

In the March quarter, manufacturing shrunk for a third straight quarter, down 1.4 percent year-on-year, and construction decreased 2.2 percent.

Farm production grew 5.9 percent and mining and quarrying output increased 5.2 percent. Utility sector output grew 4.5 percent after a decline in the previous quarter.

In the services group, output grew 2.6 percent in the trade, hotels, transport and communication segment, and rose 2.4 percent in the financial services sector.

India is still battling a severe spread of the coronavirus, or Covid-19, especially in its commercial capital Mumbai. The country went into a total lockdown, one of the most stringent, from March 25.

The government began easing the lockdown restrictions from May 18 in areas where the number of cases is less.

Household consumption and investment have been severely hurt as economic activity came to a standstill.

Economists are looking forward to significantly worse figures for the second quarter as the country remained in total lockdown throughout April and during the first half of May.

The central bank has cut interest rates twice this year and the RBI governor has warned that growth is likely to be in negative territory in the 2020-21, which would be the first contraction in four decades.

The RBI expects some recovery in the second half of the fiscal year.
The RBI maintained its accommodative stance after it cut the repo rate in a surprise move on May 22.

Goldman Sachs reportedly predicted a 5 percent GDP contraction for the 2020-21 fiscal year, which would be as deep as compared to the deepest recession India has witnessed since 1979.

“Further ahead, timely and large stimulus would have left households and firms in good shape when they emerged from the lockdown, which would have aided the economic recovery,” Capital Economics economist Shilan Shah said.

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‘People are losing jobs left, right and centre’

‘The situation is quite terrifying as you have no job creation and there will be loss of jobs.’

Five days after Finance Minister Nirmala Sitharaman rolled out her Rs 20 lakh crore economic stimulus, Reserve Bank of India Governor Shaktikanta Das stepped up on Friday, May 22, to announce a range of measures, including slashing benchmark interest rates to their lowest levels since 2000 and extending the moratorium on home loan repayments by another three months.

Do the measures announced by Sitharaman and Das in tandem serve the purpose of pulling the economy out of the morass it finds itself in, following the lengthy lockdown that has shuttered companies, led to loss of jobs and disrupted the supply chain?

“There are no jobs. So who will take these loans? And how will they repay these loans?” former Union finance secretary Arvind Mayaram, below, asks Syed Firdaus Ashraf/

How will the RBI’s latest measures help the economy?

What we have seen in the last 45 days is that the RBI has been using monetary instruments very heavily to try and shore up the economy and create some kind of stimulus so that economic activity starts coming back.

Unfortunately, what has been missed out, and the Government of India has also missed out, is that there is no demand.

If you see the last three monetary easing by the RBI, it was close to Rs 8.5 lakh crore liquidity in the market before what they have done today. They had already created that liquidity.

But how much of that money was actually used?

My estimation is that banks used only 5% of the liquidity which was available to them and rest of the money is lying with RBI reverse repo.

The question is: Who will take loans?

How low can you keep interest rates low?

As you keep lowering interest rates, then you also keep lowering interest rates on fixed deposits.

And at some point, it will be so low that people will move away from banks to gold or other instruments where they will feel their savings is secure.

So there has to be a balance kept.

The RBI in its own way has taken bold steps in terms of cutting down interest rates, and I don’t think they can go down lower than what they have done till now without having adverse effects on the other side, which is the savings side.

And we also have to remember that none of these measures taken by the Government of India or the RBI is really going to bring demand up.

We have seen destruction of demand even before COVID-19.

Even if there was no COVID-19, the prediction was last fiscal would have ended at close to 4.8 percent, which means the economy was seriously slowing down even before COVID-19.

The reason was that out of four cylinders of the economic engine, only government expenditure to an extent was intact, the rest all had come to a grinding halt — which included consumption.

And because consumption has come down so seriously and drastically, obviously there is no demand.

Today, if you look at each industry sector by sector, on an average the industries which are already existing were functioning before COVID-19 at 75% of their installed capacity.

COVID-19 will further erode growth.

They have such huge unused installed capacity.

What kind of new investments or expansion is the government expecting in a situation of this kind?

Whatever maybe done, individually it may be a good move or it may have feel-good factor but in reality the needle is not going to move at all as far as the growth in the economy is concerned.

How does one resurrect demand, which is a major concern?

It will only come when you put money in the hands of people.

And secondly, you fully restore supply chains.

Both are important.

Today, there is no money in the hands of the people if you go by the CMIE’s latest report which has given a 27% to 28% unemployment rate, and 12 crore to 13 crore (120 million to 130 million) jobs have been extinguished in the last two-three months.

There are no jobs. So who will take these loans? And how will they repay these loans?

Even if you leave the window open for NBFCs for consumer lending, who will take these loans unless they have the capacity to service (repay) that loan?

People are losing jobs left, right and centre.

Even in the financial sector, which I would have thought would have survived a little longer than manufacturing where people have to be physically present, you are seeing a huge number of people being retrenched.

Who will borrow money and start spending?

Can the economy sustain such measures as what the US and Britain are doing, like putting money in the hands of people to spend so that demand is generated?

In the current situation, if the government was to actually come up with a short-term expenditure plan, which would be of the magnitude of 5% to 6% of GDP, which is about Rs 10 lakh crore to Rs 12 lakh crore, and simultaneously announce a path for bringing the fiscal deficit down to 3 percent in the next four or five years.

You can easily sell that idea and you can borrow money or even print money and spend the money.

You must understand the other part, that if there is no consumption there is no revenue.

Income tax will fall because incomes have fallen.

GST will fall drastically because there is no sale.

Basically, the government puts Rs 10 lakh crores cash into the economy, then it is like an investment. Because every item that you purchase, even if you take an average of 12 percent GST, the government will get a return of 12 percent on the money that they have put in.

You can always say that taxation is not an investment, it is a sovereign right. Technically and legally that is true. But if you look from the perspective of the economy, then it is investment. Because the government will then get start getting GST.

When people start spending, demand is created and the ideal capacity will be fully utilised.

Jobs will be created more and demand will be created more and consumption will be more.

It is a virtuous cycle and you have to start at some point.

The RBI governor spoke of negative GDP growth in 2020-2021. What impact will it have?

If you have negative growth for three quarters running, then you are into recession. The economy is actually going to contract.

If you say it is zero growth, then the economy is in standstill.

And if you go in negative, then it contracts and you get smaller.

After a long time I am seeing this. I don’t remember when I had last seen recession.

The situation is quite terrifying as you will have no job creation and there will be loss of jobs. It is not going to be a happy situation.

Some people are asking why is the government being stingy and not putting cash in their hands? What is going on in the government’s mind? Can you guess?

The point which generally one hears all around is that it appears that your fiscal deficit is very high if you borrow a lot of money and start spending.

Two things will happen. Credit rating agencies will look at you in an adverse manner and downgrade the sovereign rating.

Secondly, they believe that if you have that kind of expenditure happening in the economy then inflation will come back.

I think they are worried about inflation after what happened in 2008 when the fiscal stimulus came out.

Those could be two reasons, but I am not sure about it.

Can we compare the Great Depression of 1929 which went on for a decade to the prevailing situation in India now?

We are not into it as yet.

But certainly, if we get into a protracted recessionary cycle and are not able to pull out in time, then we might be heading for something like that.

Many were unimpressed by the Rs 20 lakh crore stimulus that was announced in five tranches. What is your opinion?

I feel the real fiscal stimulus is less than one percent of GDP — about Rs 1.5 lakh to Rs 2 lakh crore is the fiscal part.

Rs 18 lakh crore is loans in different shapes, like loans to MSME and loans with guarantee and without guarantee of three months, more loans through NBFCs and loans to farmers, etc. These are purely loans.

Rs 8 lakh crore is the liquidity that the RBI had already injected.

And then the Budget has been repeated again by renaming and putting it in the fiscal package.

Whatever was said in the Budget was put in the fiscal package.

I don’t see any additional expenditure over and above what is budgeted by the government. Maybe Rs 1.5 lakh crore to Rs 1.75 lakh crores.

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RBI cuts repo rate again, down to 4%

Loan moratorium extended till Aug. 31

The Reserve Bank of India (RBI) further reduced the key interest rate or the repo rate by 40 bps on Friday, after a yet another out-of-turn Monetary Policy Committee (MPC) meeting as the COVID-19 pandemic induced lockdown continues, albeit with calibrated relaxations.

The central bank also extended the loan repayment moratorium for another three months till August 31.

The six-member MPC announcement has reduced the repo rate to 4% with five members of the panel voting for the steep cut while one member, Chetan Ghate, voted for a 25 bps cut. 

The MPC also decided to continue with the accommodative stance ‘as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy’, while ensuring that inflation remains within the target, RBI said.

Demand collapse

RBI Governor Shaktikanta Das termed the risk to growth outlook “gravest”.

“Domestic economic activity has been impacted severely by the two-month lockdown. The top six industrialised States that account for about 60% of industrial output are largely in red or orange zones,” Mr. Das said. 

“High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments,” he added.

The central bank refrained from giving a projection for GDP growth for the current financial year and stopped at saying that growth expected in the “negative territory” with some pick-up in growth impulses from the second half of 2020-21 onwards. “It is in the growth outlook that the MPC judged the risks to be gravest,” Mr Das said. 

Inflation target has also been held back by the central bank.


“The MPC is of the view that headline inflation may remain firm in the first half of 2020-21, but should ease in the second half, aided also by favourable base effects,” Mr Das said. 

“By Q3 and Q4 of FY20-21, it is expected to fall below target. Thus, the MPC’s forward guidance on inflation is directional rather than in terms of levels. Going forward, as and when more data are available, it should be possible to estimate the path of inflation with greater certainty,” he added. 

Since February last year, the RBI has reduced the policy repo rate by a cumulative 250 bps, from 6.5% to 4%.

And there could be further scope for a rate cut if the inflation trajectory evolves as expected RBI said. 

The central bank also extended the loan repayment moratorium for another three months, till August 31. All other conditions for the facility remain unchanged — a loan will not be classified by the lender as non-performing and there will not be any impact on individual credit scores. In addition, interest payment deferment for working capital loans has also been extended by another six months. 

RBI has also decided to increase the group exposure limit of banks from 25% to 30% of its capital base. The regulator said the decision was taken to facilitate flow of resources to the companies as many of them were unable to raise funds from capital markets and are predominantly dependent on funding from banks.

A liquidity facility for Exim Bank of India was also opened as it has been decided to extend a ₹15,000 crore line of credit for a period of 90 days to enable it to avail a U.S. dollar swap facility to meet its foreign exchange requirements. 

Also to alleviate difficulties being faced by exporters in their production and realisation cycles, it has been decided to increase the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months, for disbursements made up to July 31, 2020.

“Uncertainty associated with pandemic, normalisation of economic activity and relaxation made in social distance makes it imperative that policy response is calibrated and swift,” SBI chairman Rajnish Kumar said. 

“In this context, extension of moratorium till August 31, enlargement of the Large Exposure Framework and option to convert accumulated interest for moratorium period into term loan are welcome measures. On the export side, increase in export credit period to 15 months from 1 year and buttressing EXIM Bank through ₹15,000-cr line of credit is also timely,” he added.

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