India’s economy in deep crisis, all eyes on Sitharaman before budget

Macro indicators and latest data show how India’s economic crisis may be deepening, underlining the case for the government to take some drastic steps to boost growth.

Growth has been faltering for some months now, with GDP growing at a 20-quarter low of just 5.8% in the March quarter and the 2018-19 growth numbers also missing the 7% mark.

Now, as monsoon rains fall short and deepen the agrarian crisis, vehicle sales continue to slide on a consumption slowdown, GST collections remain below par and job creation continues to suffer, concerns have been growing.

Finance Minister Nirmala Sitharaman is scheduled to present her maiden Union Budget this Friday. She is widely expected to address this faltering growth, although her hands may be tied due to a stressed fiscal situation. Will she stick to the fiscal deficit target of 3.4% of GDP, as outlined in the Interim Budget, and let growth be the casualty? Or will the FM prioritize growth through a stimulus package entailing increased capital expenditure while letting fiscal consolidation take a backseat?

GST Collection

Government data for GST collections in June showed Rs 99,939 crore. Though this is an year-on-year increase, June was the first time in four months that the collection fell below the Rs 1 lakh crore mark. Why this is a cause of concern is clear: revenue through taxation was already a major headache for the government and below par GST collections in June may just add to its woes.

D K Srivastava, Chief Economic Advisor at EY, has already pointed out that the government’s estimated growth in net tax revenues at 29.5% (comparing actual numbers in 2018-19 and implied growth rates given in the Interim Budget) in 2019-20 is way too optimistic.

And Kruti Shah at brokerage Emkay Global has said that in the wake of a deteriorated fiscal state in FY19 and weak domestic and global demand conditions, it would be challenging to maintain the interim budget fiscal deficit target of 3.4% of GDP.

“Actual FY19 gross tax collections have slipped 7.7% from the interim budget figure of 15.5%, implying that collections in FY20 has to grow by 21.8% to match the interim figures. This takes the tax buoyancy to 2.1 times, far higher than 0.6 times in FY19.”

Simply put, the government may well be forced to revise its tax collection target downwards, if not in the budget then in the Revised Estimates later in the year. And will therefore need to curtail, not raise its total spending.

Monsoon deficit

The rains have been missing this monsoon and not only does this seriously hamper storage across India’s water reservoirs, it also means delayed sowing for Kharif crops and possible price rise of key commodities going forward.

Analysts at Elara Securities said in a note that “state governments advised farmers to delay sowing owing to monsoon deficiency and 14.66 million hectares of crops have been sown to date versus normal sowing of 19.67 million hectares and 16.21 million hectares of 2018, indicating contraction of 26% and 10%, respectively.

A larger divergence of monsoon in the central region (comprising Madhya Pradesh, Uttar Pradesh, Chhattisgarh and Uttarakhand) has significantly curtailed sowing of pulses, coarse cereals and oilseeds by 69.7% and 44.5% respectively. This in particular has led to an increase in price of pulses. The wholesale price of Tur, Urad and Moong has increased by an average of 3.69% in June versus a contraction of 4.15% during the same period in 2018.”

Mowtown Slowdown

Sales of cars and motorcycles shrank by double digits for the third consecutive month in June as buyers continued to postpone purchases due to higher vehicle ownership costs and rising vehicle prices.

In June, dispatches (vehicles sent to dealers) for the country’s biggest two-wheeler maker, Hero MotoCorp, fell by 12% to about 615,000 units and for the entire June quarter too, the decline in dispatches was about 12% to 1.85 million units for the company.

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In the case of Maruti Suzuki India, which accounts for every second car sold in the Indian market, total dispatches were down 14% in June to about 125,000 units but the mini vehicle segment declined by more than a third or 36% 18,700 units.

Hyundai Motor India’s domestic sales were down 7%, sales of TVS Motor Company (two wheelers) were lower by 5% while those for Bajaj Auto fell by 2%. Sales of even medium and heavy commercial vehicles continued to slide, indicating a continued decline in overall economic activity.

Ashok Leyland reported an almost 20% decline in M&HCV sales during June; Tata Motors saw sales in this segment slip by 13%. Even the tractors sold by Escorts Ltd fell by 10%, according to an analysis by ICICI Securities.

Jobs

Data from the Centre for Monitoring Indian Economy (CMIE) show that the unemployment rate rose to a 13-month high at 7.91% in June from 7.2% in May and was significantly higher than the 5.8% in June 2018. The government has already faced headwinds over rising unemployment and the latest numbers will only make matters worse, underlining the urgency for the Finance Minister to announce measures which boost economic growth and bring back at least some of the jobs.

All these parameters indicate the tightrope walk Sitaraman will have to undertake on Budget day. The best case scenario therefore could be that the FM does not propose any cut in spending which was proposed in the Interim Budget while also not providing any significant stimulus package.

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“Despite the huge gross tax shortfall of Rs 1.9 lakh crore against FY19BE (budget estimates), we expect the government to not cut back on spending for FY20 (interim budget targets), along with continued reliance on off-Budget spending, which could entail afiscal slippage of about 20 basis points (0.2%). Upsides from RBI dividend, 5G spectrum auctions and disinvestment targets (limited scope given market volatility) are expected to augment revenue collection. However, we rule out a bull case expectation of any significant fiscal stimulus,” said analysts at ICICI Securities.