The outbreak of Corona virus has emerged as a major challenge to Chinese authorities. As of today, more than 800 people have been diagnosed with Corona virus problem in China, with the number increasing by more than 200 in the last 24 hours. The number of deaths stand at 26 – increasing by more than 1/2 a dozen in the last 24 hours. Chinese authorities have imposed travel restrictions in 13 cities to prevent the virus from spreading. With 25th January being the day of Chinese New Year – typically the busiest travel season, the travel ban is likely to emerge as a major impediment. The travel ban is likely to affect 35 million Chinese. Millions of people are likely to travel during this weekend, increasing risks of the disease spreading.

The city of Wuhan, capital of the Hebei province was the “ground zero” for the breakout of the epidemic – majority of the deaths have occured in the Hebei province but now, 2 deaths have been confirmed which are far from the epicentre. One patient died more than 600 miles from Wuhan while another death took place in Heilongjiang, a province bordering Russia, more than 1100 miles from Wuhan. So far, the virus has also spread to South Korea, Japan, Vietnam, Taiwan, Thailand, Saudi Arabia, Singapore and 1 confirmed case in USA – through people who have recently travelled to China. Disease modelling experts from Imperial College, London have stated that they consider China’s estimates of affected cases to be “too conservative” and projected a figure closer to 4000.

Corona viruses are a family of microbes which affect the respiratory system and have a deadly recent history. The one causing the current outbreak in China has been classified as 2019-nCOV. A corona virus, Severe Acute Respiratory Syndrome (SARS), had infected 8098 in 2002-03 and killed 774. Another one, Middle East Respiratory Syndrome (MERS), was first observed in 2012 and has killed 858 till date, mostly in the Arabian peninsula. The 2019-nCOV though, is different from both SARS and MERS and has never been seen in humans before. The current outbreak started from Hua Nan seafood market in Wuhan from what is likely an animal – human “spillover” incident. The Hunan market was shut down on Jan 1st but the virus is now spreading from human – human.

It is still not completely clear how the 2019-nCOV is transmitting from human to human. But the fact that 15 health workers in Wuhan tending to Corona virus patients have been affected makes it likely that it is spreading from affected hosts to normal bodies. Corona viruses typically spread through the air, as a result of victim sneezing or coughing, therefore it is believed that face masks will offer some protection against them. Experts also strongly recommend frequent hand washing since droplets from patients’ cough/sneeze often ends up on surfaces, enabling corona virus to spread through touch also. As of now, there is no medicine or vaccine known to counter 2019-nCOV with the knowledge about the virus still very nascent.

The outbreak of the virus has already hit the Chinese economy hard. Apart from blow to the tourism sector, also suffering is the Chinese film industry with 7 films set to premiere on the Chinese New Year standing cancelled. 2020 Olympic qualifying games have been shifted from Wuhan hitting the revenues of the city further. The Chinese stocks have suffered their worst fall in last 5 months this week. Goldman Sachs has predicted that reduced travel due to the outbreak is likely to see a drop in fuel prices especially aviation fuel.

After a positive growth in the festive months of October and November, retail sales of passenger vehicles as well as commercial vehicles again slumped in December, 2019, as per figures released by the Federation of Automobile Dealers Association (FADA). The vehicle registrations in Regional Transport Offices (RTO) has been considered as a surrogate for vehicle retail sales by FADA. The December data shows that passenger vehicle sales in Dec’19 fell to 2,15,716 units from 2,36,586 units a year back – a decline of 9%. The only segment which showed a positive trend in December was 3-wheelers which grew by a mere 1% from corresponding period a year back. 2-wheelers registrations declined by 16% while the sharpest drop was seen in commercial vehicles segment which fell to 67,793 units in Dec’19 vis-a-vis 85,833 units in Dec’18.

As per FADA’s official statement, despite attractive discounts and robust customer enquiries, conversion to actual sales remained subdued in December, with weak consumer sentiment being considered the main reason for this decline – sharpest so far in the current financial year.

In more gloomy news, according to figures released by the Center for Monitoring Indian Economy (CMIE), unemployment levels in the country rose to 7.5% in the period Sep-Dec 2019. According to CMIE estimates, this was the seventh consecutive wave in which unemployment has increased, starting May-Aug, 2017 when the unemployment rate stood at 3.8%. The CMIE data is based on survey of 1, 74, 405 households across the country.

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In a most worrying trend, it emerges that unemployment increases with higher education, suggesting that quality of employment is also a major challenge. Unemployment among age group 20-24 years, typically the career starting age is at 37.0%, while the same jumps to 63.4% among graduates in that age group.  

Last year, the NSSO data for the period July 2017-June 2018 estimated unemployment at 6.1% – a 45 year high figure. However, government said due to change in methodology, was not comparable to past data.

All eyes are now on the Union Budget 2020 to see the steps planned by the government to pull the economy out of the current state of doldrums.

The NITI Aayog published the status report on Sustainable Development Goals -2019 on 27th December, 2019. United Nations in 2015 has set up 17 sustainable development goals for countries like India. NITI Aayog started publishing a status on 13 of these 17 sustainable goals since 2018. The first such report was published in December, 2018. The report published in 2019 therefore not only talks about the status in terms of the SDG, but also provides a comparison of the situation with respect to 2018. In this article IPD focuses on the performance for SDG 1 and SDG 2.

‘SDG Goal 1: No Poverty’ index is measured using five indicators: (a) population living below the poverty line (b) household with health cover (c) people getting employment under MGNREGS (d) social protection and (e) those living in ‘kuchha’ houses. The measure is calculated for the all India level as well for the state level separately. ‘SDG Goal 2: Zero Hunger’ index comprises of 7 indicators – (a) rural households covered under PDS (b) stunted children under 5 years (c) anaemic pregnant women (d) 6 to 69 months old children who are anaemic (e) underweight children in 0-4 years (f) rice, wheat and coarse cereals produced in kg/ha (g) gross value added in agriculture per worker. Higher the value of the index better is the performance for both SDG 1 and SDG 2.

In terms of both SDG 1 and SDG 2 index, there is a decline in performance observed in 2019 as compared to 2018. The drop in performance is more severe for SDG 2- Zero Hunger where we see a 13 point drop in the index in 2019 as compared to the previous year. This is an alarming situation where we see a deterioration in terms of poverty and hunger. The results are in hands with the findings of the global hunger index where India holds a dismal 102 nd rank.

In terms of poverty, media reports recently cited that the unpublished report on Consumption survey of National Statistical Organization (NSO) cites a decline in monthly per capita expenditure in 2016-17 as compared to 2011-12. This was the first time after independence that a decline in MPCE is noted hinting increase in poverty. Government however discarded the survey citing data quality issues and initiated the process for a new survey. The findings of NITI Aayog that there is a deterioration of the poverty index hints to similar results as the unpublished report.

When we look at the state level, it is found that Tamil Nadu, Andhra Pradesh and Uttarakhand are the top 3 states in terms of ‘SDG Goal 1 – No Poverty’ index in 2019. Jharkhand, Bihar and Uttar Pradesh are the bottom three states. These three low performing states also showed severe decline in performance in 2019 as compared to 2018. Apart from Andhra Pradesh, no other major states showed improvement with the decline severe in already bottom ranked states. So while majority of the states performed badly in terms of poverty, the poorer states became more poorer. This is an alarming trend.

In terms of the ‘SDG Goal 2 – Zero Hunger’ index, Kerala, Punjab and Tamil Nadu are the top ranked states and Jharkhand, Madhya Pradesh and Bihar are the bottom ranked states in 2019. In terms of comparison with 2018, Kerala is the only state which showed improvement while all other states showed significant deterioration. Here also the deterioration is severe for bottom ranked states as compared to the top ranked states.

So in terms of both poverty and hunger it is seen that not only there is a decline in India’s overall performance in eradicating poverty and hunger, almost all states has sees a decline. The states with low performance showed a higher drop in performance. This is a severe problem. This needs to be addressed as soon as possible. NITI Aayog provides no explanation in terms of the change in performance.

Why India is witnessing rise in poverty and hunger after having registered extraordinary improvement between 2005-06 and 2015-16 – as was revealed by the 2018 UNDP-Oxford report on multidimensional poverty index (MPI) remains a reason to worry. The unreleased consumption survey could have provided some explanation on how severe is the problem and could have helped in providing explanations. There has been a significant rise in unemployment, with the unemployment rates are highest ever in last 45 years. Further to that there has been a slowdown with the quarterly GDP growth declining to 4.5%. This is a result of slowdown in domestic demand as well as a decline in exports. All of these factors have an impact directly or indirectly on poverty and hunger and can be the potential reasons for this deterioration.

IPD sincerely hopes that action in this regard will be taken with regard to this in the upcoming budget and thorough focus will be given to reverse the trend in the Indian economy.

According to the National Crime Records Bureau (NCRB) data released recently, the Rs 2000 note, introduced in end 2016 post demonetization (withdrawal of old Rs 500 & 1000 notes) contributed the maximum to fake currency seized by law enforcement officials. In 2017, fake notes worth Rs 28.10 crores were seized, out of which 53.3% in value was 2000 notes. In 2018, while overall seizure reduced to Rs 19.95 crores, share of 2000 notes increased to 61.0%. Across the two years, 2000 notes accounted for 56% of total fake currency seized. Post the demonetization announcement, Rs 45.44 lakhs of fake 2000 notes was seized in the remaining 53 days of 2016 itself. RBI annual report for the last two financial years also echoes a similar scenario although the figures are different. In FY 2017-18, total 17, 929 fake 2000 notes were detected in the banking system. In FY 2018-19, this figure increased to 21, 847 notes – an increase of 21.9%.

When the Rs 2000 note was introduced, as per RBI it had several new features which made it more difficult to fake. These included see through register with denominational numeral 2000, latent image with denominational numeral 2000, denominational numeral 2000 in devanagari script, micro letters “Bharat” (in Hindi) and “India”, denominational numeral with Rupee symbol in colour changing ink (green to blue), Swachh Bharat logo with slogan, motif of Mangalyan etc. Yet as the above figures show, the counterfeiting of these notes has only increased with time. According to a response from RBI to a RTI query, no new 2000 notes have been printed in the FY19-20.

In terms of state wise trends, as of December 2018, fake 2000 notes had proliferated to 27 states and UTs. Jharkhand, Meghalaya, Sikkim, A&N Islands, Lakshwadeep Islands, Chandigarh, Puducherry, Dadra & Nagar Haveli and Daman & Diu were the only states/UTs where no fake 2000 notes were recovered. More than 1/4th of all fake 2000 notes recovered were from the state of Gujarat – amounting to 6.93 crores. Following Gujarat were West Bengal, Tamil Nadu and Uttar Pradesh with seizures of 3.5 crores, 2.8 crores and 2.6 crores respectively. Together, these 4 states accounted for 56% of the fake 2000 notes recovered.

In another worrying piece of statistic, even fake of new Rs 500 notes has also surged substantially in the year 2018. While fake 500 (new) notes accounted for only 1.57% of total seizures in 2017, in the next year the same increased to 7.21%. The RBI data also shows same trend: no. of fake 500 notes in circulation increased by a whopping 121% from FY17-18 (9892) to FY 18-19 (2,21, 218).

The NCRB and RBI data clearly shows that despite the additional security features introduced in the new notes, fake currency continues to be a major source of concern for the establishment.

Yesterday the retail inflation numbers were released for the month of December, 2019. The overall retail inflation has seen a increase from 2.11% in December, 18 to 7.35% now. More severe increase is seen in the food inflation, from -2.65% in same month, last year to 14.12% now. Earlier this week the advanced estimates for GDP growth was released for FY 19-20. The real GDP growth rate stood at 5% as against 6.8% in FY, 18-19. The quarterly growth rate for September, 2019 stood at 4.5%. Earlier this financial year, the PLFS data on unemployment was released with the unemployment rate stood at the highest in last 45 years.

The phenomenon of rising inflation and slow growth with a high unemployment is regarded as stagflation in the economic literature. The present situation of Indian economy shows early signs of stagflation given all the economic indicators mentioned above. If this same trends of high inflation and slow growth persists for one or two more quarters then actually the country will be under stagflation.

Why should be worry about stagflation? Stagflation hints a severe problem for the economy as  it’s an unnatural situation because inflation is not supposed to occur in an economy facing slow growth. This is a difficult situation for the government and the central bank of the country to manage. As any measure of controlling inflation by increasing the interest rates typically will lead to fall in investments and demand in the market leading to further slowdown in the GDP growth rate. Similarly a focus to increase the GDP growth rate by pushing more money in the economy can lead to further increase in inflation. So this is like a catch 22 situation for the policy makers as any policy can worsen the situation.

Now what has lead the Indian economy to this situation where we are seeing the early signs of inflation. As per the experts from Bloomberg, the heart of India’s problems is a slump in consumption following a combination of policy missteps, from the unprecedented decision of demonetization by banning over eighty five percent of the notes under circulation at the end of 2016, to the chaotic implementation of a unified goods and services tax (GST) the following year. That was followed shortly after by a credit crunch, which triggered a crisis among shadow lenders — a key provider of small loans to hundreds of millions of consumers and businesses.

There has been a severe decline in private consumption. The export growth also has shrank. The growth of investments also has seen a slowdown. All of these have caused a slowdown in the GDP growth rate. The most severe problem is the slowdown in demand. There was a sharp drop in automobile sales. Retail demand also has seen a severe slowdown. This has lead to a job losses in many sectors and production has been stalled in many firms. The people intensive sectors of India mainly the agriculture, manufacturing and construction has seen a significant slowdown. This has been one of the prime factors causing the slowdown in demand. Consumption makes up about 60% of gross domestic product, and spending has slumped as businesses shed jobs and put off investment plans. Consumer sentiment remains in the doldrums and the recent volatility in oil prices could be a further drag on spending.

The RBI has announced multiple rate cuts and the government of India also pumped in money in various sectors. The government also announced a cut in corporate tax rates to pump up the private investments. Specific packages has been announced for real estate sectors which is facing a huge dearth in demand. But many of this steps where supply focused and did not quite address the demand problem. The rate cuts have not helped either.

Experts called for direct money transfer in the hands of people as one of the solutions. Now with the unnatural rains this time and coupled with the oil price rise the food inflation has seen a severe increase causing the retail inflation to rise. The vegetable inflation stood as high as 60%. At this point addressing the demand problem in the economy will further lead to a rise in inflation. On the other hand addressing the inflation problem will lead to further slowdown. This makes the job of the finance minister and the RBI very challenging.

There is a need of utmost focus in the health of the economy right now to ensure that this trend of rising inflation and slowing growth does not persist for long. After negative index of industrial production for last three months, the latest numbers have seen a positive growth. This gives some sense of hope. But one has to understand this positive growth is mainly driven by a lower base effect. It needs to be seen how IIP fares in the next few months. Moreover close focus on inflation needs to be given. India’s recovery is still sputtering. The GDP tracker of Bloomberg shows growth slamming into reverse in November after a pickup in October, adjusted for year-earlier base effects as per as reports published by them. This cautions against any premature withdrawal of policy support.

This is a crucial period for the Indian economy. a lot of eyes will be on the upcoming budget and also on the role of Reserve Bank of India. IPD sincerely hopes that in this crucial times some pro active measures are taken to ensure that economy does not go into stagflation. Experts needs to be consulted and focus committees needs to be formed to measure the impact of all the policies taken in this juncture and if any of the policies leads to adverse trends, those needs to stalled and counter policies needs to be taken. This is only possible if an expert committee closely monitors the economy.

Retail inflation (based on consumer price index) in the country has surged to 7.35% in December 2019, primarily due to increase in food prices and telecom tariffs, according to official data released earlier today. It stood at 5.54% in Nov’19 and 2.11% in Dec’18. This is the highest level observed since July 2014 when the CPI based inflation had surged to 7.39%. Although “core inflation” – a metric that excludes volatile components like food items – stood at 3.7%, marginally higher than same period last year. CPI based inflation thus has now breached the 2-6% limit set by the RBI.

Food inflation as a whole increased to 14.12% in Dec’19 from 10.01% in the previous month. Food inflation had stood at (-)2.65% in Dec’18. Increase in vegetable prices was the main factor behind the sharp increase in food inflation – refer image below.

One of the key drivers for the sharp increase in food inflation was the unnatural surge in onion prices in December – caused to a large extent due to unseasonal rains.

The news further illustrates the challenge around the economy with the GDP growth rate for FY20 projected at an 11 year low in the advance official estimates released last week.

Industrial output in the country showed a positive trend in Nov’19 after 3 months of continuous contraction, according to official data released this past Friday. The Index of Industrial Production (IIP), has grown by 1.8% in Nov’19, vis-a-vis corresponding period a year ago. The IIP had contracted by 3.8% in Oct’19. For the cumulative period Apr-Nov’19, industrial output grew by 0.6% compared to 5% growth in the same period last year.

• Mining output growth stood at 1.7 percent in November against a contraction of 8 percent in October
• Manufacturing output growth stood at 2.7 percent in November compared to a contraction of 2.1 percent in the preceding month
• Electricity generation contracted 5 percent compared with a contraction of 12.2 percent in the preceding month

While the IIP showing positive in November is certainly an encouraging trend after 3 months of continuous retraction, yet following factors should be borne in mind:

• The IIP grew by just 0.2% in Nov’18. Therefore, the Nov’19 IIP benefitted from a favourable base effect. The same effect is unlikely to be there in December
• While consumer non-durables showed a positive trend (2% growth Vs 1.1% contraction in Oct) , consumer durables segment was again in the red (1.5% de-growth Vs 18% de-growth in Oct), contracting for the 6th month in a row
• Same is true for capital goods (8.6% de-growth in Nov), primary goods (0.3% de-growth in Nov) and infrastructure & construction components (3.5% de-growth in Nov) which continued to contract. These being critical use based categories, growth in these is vital for reliable positive trend in the industrial sector

Still with 13 of the 23 industry groups showing growth (compared to 5 in Oct), it is an encouraging sign. IPD hopes that the positive trend continues in December.