Automotive sector continues to struggle in February 2020

Figures released by Society of Indian Automobile Manufacturers (SIAM) revealed that the automobile sales in February’20 declined by close to 20% vis-a-vis same period last year. The same had dropped by 13.8% in Jan’2020 (y-o-y).

Total vehicle sales Feb’19 – 20, 34, 597 units

Total vehicle sales Feb’20 – 16, 46, 332 units (decline of 19.08%)

The current slowdown conditions and the impending transition to BS-VI norms is stated as the primary factors behind this drop, as per SIAM. Drop in sales is observed across categories. Domestic passenger vehicle sales, which had declined y-o-y 6.2% in Jan’20, declined by 7.61% in Feb’20. Car sales in Feb’20 also declined by 8.77%. Two-wheeler sales saw a sharp drop of 19.82% in Feb’20 compared to the same period year back. Sale of commercial vehicles also saw a decline of 32.9% y-o-y in Feb’20.

The Indian automotive sector has been struggling for a while now with a depressed domestic demand. The uncertainty around the shift to BS-VI norms added further complexity to the situation. Now, with supply line disruptions expected from China and the global economic effect of the coronavirus pandemic, hopes of any immediate recovery look grim for the sector.

GST collection over 1 lakh crore for 4 months in a row

The GST collection numbers for the month of February was announced a couple of days back. This is based on the economic activity in the month of January.

Source: Government of India

The GST collection for the month of September and October , 2019 was less than the same in the previous years. But ever since the cap on input tax credit was announced there has been a increase in GST collection.One reason for the increase in GST collection is the step taken by government to cap the input tax credit to 20% to control for revenue leakage. This was announced in October.

Source: Government of India

There was around 8.3% growth in GST collection in Feb, 2020, as compared to the same month previous year. This is significantly less than growth of 13.1% as of Feb, 2019. The growth numbers of January, 2020 also has been significantly less than that of the last year. So while GST growth which showed a downward trend since Mar, 2019 to Oct, 2019, witnessed a rise in growth rate since Nov, 2019, the growth rate has been much less as compared to the growth rate in the same month previous year.

Source: Government of India

The GST collection growth with respect to the previous month has been less in 2019-20 as compared to 2018-19 for almost all the months when growth rate for both the years has been positive and also when both declined the decline has been more severe in 2019-20. But then there are exceptions. November, 2018-19 saw a negative growth in GST collection while the same number in the next year has shown a significant increase as against the month of October. The decline in December in 2018-19 has been higher than the decline in Dec, 2019-20. But the general trend is again visible in Jan, 2020. The growth rate with respect to previous month for the month of Feb has been very similar for both 2019-20 and 2018-19.

GST revenue collection reflects the economic activity and a increase in that is indicative of a rise in demand in the economy. However as have mentioned earlier with the cap on input tax credit to 20% to control for revenue leakage was announced in the month of October. The rise in GST collection happened only after that. So this increase in GST collection might not be indicative of a rise in demand in the economy but may be purely because more efficiency in terms of reducing revenue leakage. Once concern is in spite that measure to stop the leakage the growth rate in GST (as compared to same month previous year) has been lower in Jan and Feb, 2020 has been lower the growth numbers for the same months in 2019. It is to be seen how the trend continues in the months to come.

A glance into the state of Indian Economy as the 3rd Quarter numbers are announced

The second advanced estimates of national income, 2019-20 and the quarterly estimates of GDP for the 3rd quarter of 2019-20 was announced by the Ministry of Statistics and Programme Implementation (MOSPI) on 28th February, 2020. Let us first look at the performance based on the advanced estimates and then we will focus on the performance with respect to the quarterly estimates.

Source: MOSPI, Government of India

The advanced estimates puts the growth rate for 2019-20 to be at 5% as against 6.1% (Basis the 2nd revised estimates) in the previous financial year. This is significantly lower than the 7-8 % growth achieved couple of years back. The per capita GDP is predicted to grow by 3.9% as against 5.1% in the previous financial year. The per capita GDP is defined by GDP divided by the total population. So it reflects will be the GDP per person.

Source: MOSPI, Government of India

In terms of the sectoral growth, it is seen that apart of agriculture and mining, almost all other sectors have slower growth as per the advanced estimates in FY 2019-20 as against FY 2018-19. The higher growth in agriculture as per this report is a solace as it is the major source of income for a sizable section of population. But it has its own challenges in terms of farmers not getting correct prices and also the over dependence on this sector.

The drop is most severe in manufacturing sector. The slow growth in manufacturing and construction which employ a large section of population after agriculture is a big sign of worry. The unemployment rate has seen a record surge as per the latest reports on employment status.

Also the services sector which contributes the highest to India’s GDP has witnessed a slower growth as cited by the drop in growth rate for electricity, gas, water supply & other utility services and trade, hotel, transport communication and services related to broadcasting. The only silver lining is a marginal increase in the growth rate of financial , real estate and professional services. But the drop in the first two is much more severe than the increase in the growth rate of financial sector.

Source: MOSPI, Government of India

In terms of expenditure, all heads have witnessed a slower or negative growth in FY 19-20 as per the advanced estimates. There has been a slowdown in demand with a decline in growth rate of private consumption. Moreover given the challenges faced in the international market, exports show a negative growth in this financial year as against a massive positive growth in previous financial year. Also there is a significant drop in the imports as well. All of this is suggestive of a significant slowdown in demand.

A slowdown in demand would be detrimental for the businesses as this would mean lower revenue. This situation would mean a low or negative growth in investments. This is reflected by the negative growth in the gross capital formation in this financial year as against a higher growth rate in the previous financial year.

When economy faces a slowdown, what is needed is a surge in government spending as per the prescription suggested by the Keynesian economists. But what we see is a drop in the growth rate of government final consumption expenditure as per the advanced estimates. The government has faced with the need of more funds and we have seen a transfer from the reserves of RBI to the government. But along with this transfer the government also had to announce corporate tax cuts to get in more investments and what this means that the government has less funds to spend. Also there has been a lot said with the central government not giving states their due of the GST revenue.

Source: MOSPI, Government of India

Let us now look into the performance of Q3, FY 19-20 as being reported by the government. It must be noted here that the government revised the quarter one and quarter two growth estimates upwards. The Q1 estimates was revised to 5.6% as against 5% reported earlier. The Q2 numbers was revised to 5.1% from 4.5%. As per the estimates reported, the Q3 growth numbers stood at 4.7%. This would mean the growth rate in the third quarter is the lowest in the last 6 years. Moreover as compared to previous financial year, there is a slow growth in all three quarters in this financial year.

Source: MOSPI, Government of India

As is seen in terms of the advanced estimates, apart from agriculture, mining and financial services sector all other sector has witnessed a slow or negative growth in quarter three, this financial year as compared to the same quarter in the previous financial year. The drop in the growth rate of the people intensive sectors like manufacturing and construction is very severe with manufacturing witnessing a degrowth.

Source: MOSPI, Government of India

In terms of expenditure growth, there has been a decline in growth rate in terms of all heads except for government expenditure in Q3, 2019-20 as compared to same quarter, previous year. The decline in private consumption was much sharper in previous quarter.

In terms of gross capital formation, when we compare quarter on quarter growth, it is seen that as compared to quarter 1 there has been over 9% decline in gross capital formation in quarter 2 in this financial year. In quarter 3, there is around 3.7% growth in capital formation as compared to quarter 2. One must remember that the corporate tax reduction was announced in the middle of Q2. So is this rise in q3 as compared to Q2, due to this corporate tax cut. It must be noted in this respect in previous years when one compares quarter on quarter growth, there has been close to 5% growth in gross capital formation in Q3 as compared to Q2. So one really cannot attribute this fully on the corporate tax cut.

So in a nutshell with the revised estimates of quarter one and two, the Q3 performance seems to be the worst till now. IPD has reported that IIP, Core sector growth rate and credit to different sectors has shown a decline in Q3 as compared to Q2. Only in terms of personal credit there has been a marginal growth. So the GDP numbers seems to be inline with the quarter 3 performance being the worst among the three quarters of this financial year. The core sector growth in January has shown a positive growth after many months. It needs to be seen whether this trend continues in the coming months. If this trend continues, we can see some recovery in Q4.

Growth Forecast for Q3, 2019-20, IPD pegs it to be between 4.3%-4.6%

The official growth figures for Q3, 2020 is to be released in the next few days. The revised estimates for the overall FY 2019-20 growth which was released in Jan, 2020 showed a 5% growth for the financial year. The Q2 growth stood at 4.5%. What has changed since Q2. The growth rate of Q3, FY 18-19 stood at 6.6%.

Source: Government of India

The IIP and the core sector growth numbers showed a steady decline since the first quarter of FY, 2019-20. The decline has been must sharper in Q2 as compared to Q1. The negative trend continued in Q3. There has been a sharper decline in GST collection in Q2, FY 19-20 as compared to Q1 for GST collection growth. The same has seen a marginal increase in Q3. One reason for the increase in GST collection is the step taken by government to cap the input tax credit to 20% to control for revenue leakage. This was announced in October. This might also be suggestive of some surge in demand which saw a sharp decline in the previous quarters.

Source: Reserve Bank of India

In terms of sectoral credit growth as reported by Reserve Bank of India, it is seen that almost all the sectors have witnessed a lower credit growth in Q3, 2019-20. The growth rate is significantly lower in almost all the sectors, the most severe being the services sector where it almost has been halved. The only area where there was a marginal growth in the credit growth in the personal credit growth. Personal credit growth is driven by the demand. If we look at the monthly trends it is seen that the highest growth in personal credit was in the month of October, 2019, which happened to be the festive month in India. Since then there has been a decline. But riding on the surge during the festive month we witness a marginal surge in quarter growth number. All the sectoral credit growth numbers are much lower than the growth numbers in the same quarter, last financial year.

The two most prominent factors responsible for slow down in Indian Economy has been the lack of demand and also the slowdown in investments. The Q3, indicators are suggestive of the fact that while the lack of demand is very much there as compared to last year, but when compared quarter on quarter , it has almost remained same with a marginal surge. The sectoral growth numbers are clearly suggestive of the fact that the investment situation has worsen in Q3 as compared to the previous quarters. This is reflective in the decline in IIP and Core sector growth as well

IPD finds that among all the indicators, IIP , growth rate in Personal Credit and Core sector growth has very high correlation with the GDP growth rate. This is followed by the credit growth rate of service sector. Based on all the above indicators IPD forecasts that the GDP growth rate estimates in Q3, FY 19-20 will be between 4.3% – 4.6%.

All major institutions has been conservative in forecasting the growth rate for Indian Economy. NCAER has predicted the growth to be around 4.9% while Motilal Oswal research team has pegged the growth numbers to be closer to 4%. SBI has pegged the growth rate for Q3 to be at 4.3% In terms of YoY growth, Moody’s has reduced the forecast to 5.4%. SBI has predicted 4.7% growth rate in FY 19-20. . The YoY growth rate for FY, 18-19 stood at 6.8%.

Moody’s lowers India’s growth rate

Credit rating agency Moody’s has announced the downgrading of India’s growth forecast for 2020 to 5.4% from 6.6% it had projected earlier. The growth projection for 2021 has also been reduced to 5.8% from earlier announced 6.7%. The earlier projections were announced in November’19.

In today’s update, the rating agency has stated that the downward revision of the growth rates is more due to internal factors than external variables. It further stated that revival of the economy would be dependant on reversal of demand slump and bank credit growth and the agency considered the union budget 2020 as lacking enough stimulus to drive domestic demand.

Complicating the current economic scenario is the coronavirus outbreak in India. India is moderately vulnerable to the outbreak. A wide range of Indian manufacturing units are dependant on supplies from Chinese factories that remain inactive. This is likely to put supply chain management of Indian manufacturers in a spot of bother.

Budgetary Allocation Trends on Education and Health

The Union Budget was tabled in the Lok Sabha on 1st February, 2020. The overall budget allocation witnessed a 7.6% increase from the last budget. This growth in overall budget allocation has been the lowest in the last 5 years. The increase was as high as 21.2% in 2018-19. But since then it has seen a slow growth.

Source: Union Budgets, Ministry of Economic Affairs, Government of India

While there has been a 7.6% increase in the overall allocation in 2020-21, the same increase has been 4.7% in terms of allocation to education and 3.9% in terms of allocation to health. This has been lower in terms of last year for both education and health. The retail inflation is as high as 7.5% in January. So effectively in real terms there is deceleration in the growth rate of allocation to health and education.

Source: Union Budgets, Ministry of Economic Affairs, Government of India

The allocation to education has been 3.26% of the total budgetary allocation which is lower then last year when it was 3.36% of the total budget, This is also significantly lower as compared to the previous years. This has been been the lowest in last ten years. The same percentage hovered around 5% till 2016-17. Since then there has been a decline.

Source: Union Budgets, Ministry of Economic Affairs, Government of India

The allocation to health has been 2.21% of the total budgetary allocation with a marginal decline from last year. The percentage of allocation to health in the total budgetary allocation has seen a constant increase since 2015-16 with the highest being 2.4% in 2017-18. It has hovered around this range as against 1.7-1.9% during 2014-15 to 2016-17. The same was around 2.3% during 2011-12 to 2013-14.

The budget also gives the actual estimates of the money spent in previous years. This year the actual estimates of 2018-19 was reported. There has been a 14% growth in the actual estimates of the total spending in 2018-19 as compared to the previous year. This has been the highest in the last three years.

Source: Union Budgets, Ministry of Economic Affairs, Government of India

While the overall actual estimate saw a significant rise, the same was not visible for education and health. The growth in actual estimates has been as low as 0.2% in 2018-19 and this is significantly less than the previous year. The growth of health allocation has been as high as 36% in 2017-18. But this also saw a decline and the growth in 2018-19 is 2.9%.

Source: Union Budgets, Ministry of Economic Affairs, Government of India

A comparison of the percentage of the total allocation of the budgetary estimate and the actual estimates for education shows that while there has significant gap in the two estimates with the actual estimates lower than the budgetary estimates till 2016-17, for 2017-18 and 2018-19, 100% of budgetary allocation was spent on education. However as discussed above there has been decline over time with the actual spending on education which was 4.6% of the actual spending as of 2011-12, stood at 3.3% in 2018-19.

The comparison of budgetary and actual estimates for health shows a reverse picture. Since 2014-15 there has been more than 100% spend on health actually as compared to the budgetary estimates. Overall also there has been a steady increase with the actual spending on health stood at 1.9% of the total spending in 2011-12, the same is at 2.2% in 2018-19.

IIP Show a Decline while Retail Inflation Continues to Rise

The Ministry of Statistics and Programme Implementation released the Index of Industrial Production numbers for December, 2019 and the retail inflation numbers for the month of January, 2020 yesterday.

Source: Ministry of Statistics and Programme Implementation, Government of India

After a positive IIP in the previous month, there is again a decline in the IIP in the month of December, 2019. IIP growth stood at -0.3% in Dec, 2019 as compared to 1.8% in Nov,2019. The same number in Dec, 2018 was at 2.5%. Manufacturing and Electricity show a decline in the month of Dec, 19 while Mining shows a increase. The negative growth of IIP is reflective of lack of demand in the economy. We saw a positive growth in IIP in November riding on the the surge in demand in the festive season. But this surge did not sustain and we again see a decline.

Source: Ministry of Statistics and Programme Implementation, Government of India

A comparison between the first nine months of FY,18-19 and FY-19-20 suggests that across all sectors there has been a decline in the IIP in Apr-Dec, 2019 as compared to Apr-Dec, 2018. It needs to be noted that the decline in Manufacturing is very alarming as this is one of the most people intensive sector after agriculture. The slow or negative growth of the people intensive sector’s IIP has a huge adverse impact on the job creation and leads to higher unemployment. Moreover it should be noted that in Dec, 2018 out of the 22 industries which contribute to manufacturing IIP, only 6 show positive growth while the rest 16 show a negative growth.

Source: Ministry of Statistics and Programme Implementation, Government of India

The retail inflation continues to see a surge with the CPI being as high as 7.59% in Jan, 2020. Rising inflation in a phase where there is a decline in IIP is very alarming as this makes the situation challenging for the policy makers. Rising price reflects that demand will fall further and this will have further impact on IIP leading to further decline.

Source: Ministry of Statistics and Programme Implementation, Government of India

The inflation rate is highest for the food and beverages category which means that the impact of this rising inflation is all across the population across income strata. Food price index is as high as 13.63%. This massive increase in inflation of the most essential category reflects a huge dent in people’s pocket. This further can reduce the savings rate given people have to spend more on essential commodities and can have a adverse impact on future investment as well.

Source: Ministry of Statistics and Programme Implementation, Government of India

A typical food basket for a vegetarian Indian household will have cereals, vegetables and pulses, while the same for a non vegetarian household will have meat, fish and egg in addition to the cereals , vegetables and pulses. The most severe increase in inflation rate is reflected in all the essential items which are typically in the food basket of an average Indian. The vegetable inflation is as high as 50%. This is suggestive of production bottle neck in agriculture as that is a primary reason for this rising food inflation. This reflects a very poor state of affairs for the most people intensive sector of the country.

Source: Ministry of Statistics and Programme Implementation, Government of India

There has been a lot being said on the declining demand specifically in the rural sector. The situation becomes further alarming with the rise in inflation rate being more severe in rural sector. While the urban sector has witnessed a slight decline as compared to previous month, the rural sector has seen a further increase. Moreover for the rural sector the rise when compared to same month previous year is much sharp than the urban sector. This will have further impact on the declining rural demand. Moreover with the bottle neck in the agricultural sector, majority of the rural population which demands primarily on agriculture has been witnessing a huge slowdown in regular income. Over and above this there has been a rising inflation.

The two main components of this is the fact that the farmers are not getting the correct price and the huge dependence of rainfall. This season there has been nonseasonal rainfall which has hampered the vegetable production. Further with the farmers not getting the right price, the ability of the farmers to withstand such loses in production is very grim. IPD sincerely hopes that steps are being taken to solve the bottle neck in agricultural sector.