scorecardresearchUneven economic recovery, elevated inflation concerning, says Ind-Ra

Uneven economic recovery, elevated inflation concerning, says Ind-Ra

Updated: 09 Sep 2022, 11:31 AM IST
TL;DR.

In a new report, (Ind-Ra) said the Indian economy still has a long way to go.

GDP numbers released by the National Statistical Organisation (NSO) showed that the Indian economy grew 13.5% year-on-year (YoY) in April-June 2022 (1QFY23).

GDP numbers released by the National Statistical Organisation (NSO) showed that the Indian economy grew 13.5% year-on-year (YoY) in April-June 2022 (1QFY23).

India Ratings and Research (Ind-Ra) is of the view that India's economic recovery is showing resilience, however, the rating firm highlighted that its unevenness and elevated inflation are concerning.

In a new report, (Ind-Ra) said the Indian economy still has a long way to go. Here's what the rating agency said:

GDP growth in Q1FY23

According to the recently released GDP numbers by the National Statistical Organisation (NSO), the Indian economy grew 13.5% year-on-year (YoY) in April-June 2022 (1QFY23). This is in line with Ind-Ra’s expectation of

13.3%. The GDP growth did get a boost due to the base effect, but it also showcases the resilience of the Indian economy to the global headwinds emanating from the higher commodity prices and the Russia-Ukraine conflict.

Some of the major economies such as China, the US, the UK and the Eurozone during the same period grew at 0.4%, 1.7%, 2.9% and 3.9% respectively.

Ind-Ra said in the aftermath of COVID-19, the analysis of YoY growth does not provide a true picture of the economic recovery due to the low base of FY21 and FY22. Therefore, a better way to assess the recovery in GDP/gross value added (GVA) is to compare the growth trend by taking the pre-Covid-19 period as a base. When done so, the GDP shows a CAGR of just 1.3% during 1QFY20- 1QFY23 as against 6.2% during 1QFY17-1QFY20.

“Among all the sectors, the CAGR growth of the services sector shows the sharpest decline to 1.0% during 1QFY20-1QFY23 from 7.1% during 1QFY17-1QFY20, implying that the recovery in the sector is still weakest”, said, Paras Jasrai, Analyst, Ind-Ra.

Dwindling wage growth

The household sector, which accounts for 44%-45% of the GVA, saw its nominal wage growth decline to 5.7% during FY17-FY21 from 8.2% during FY12-FY16. This means that the wage growth in real terms is close to just about 1%.

Since much of the growth in consumer demand is driven by the wage growth of the household sector, a recovery in their wage growth is going to be critical for a sustainable and durable recovery in private final consumption expenditure and overall GDP growth in FY23.

Even the recent trend in wage growth at the rural and urban levels alludes to an erosion of the purchasing power of households.

At the nominal level, the wage growth in urban and rural areas was 2.8% YoY and 5.5% YoY, respectively, but in real terms (adjusted for inflation) was about negative 3.7% and negative 1.6% in June 2022.

Economic activity progressing well, but recovery is uneven

The economic activity in sectors such as industry, although progressing, is uneven. The YoY growth in the industrial output came in at 12.3% YoY in 1QFY23, but on a sequential (seasonal-adjusted) basis, it contracted 0.1% mom in June 2022.

Even when compared with the pre-pandemic level (February 2020), although the majority of the sectors are now above the pre-pandemic level, consumer non-durables are still lagging (output 95.1% of the pre-pandemic level).

Services activity is slowly picking up as normalcy is returning after a gap of two years with most of the Covid-19-related restrictions gone.

Cargo (ports and airways) and freight (railways) traffic have been witnessing strong growth in the range of 8.3%-15.1% YoY in July 2022, but the passenger traffic (for both air and rail) still trails the pre-pandemic level even in July 2022.

The non-food credit growth has been 15.1% YoY in July 2022, led by broad-based growth in all the sub-heads (industry, personal loans, services, etc.).

External sector under pressure

Post the Russia-Ukraine war, India’s external sector has come under pressure due to a spurt in commodity (such as coal, fertilisers, crude oil) prices, flight of capital and weakening of the currency.

As a result, the trade deficit (goods) reached USD30.0 billion in July 2022. Merchandise imports grew 43.6% YoY, but merchandise exports grew only 2.1% YoY in the same period.

However, support from services exports continued as it netted a surplus of USD9.33 billion in July 2022.

Inflationary pressures to persist in near-term

Inflation both at the consumer and wholesale levels remains high, despite some moderation lately. Retail and wholesale inflation came in at 6.7% and 13.9%, respectively, in July 2022, down from the peak of 7.8% in April 2022 and 16.7% in May 2022.

Ind-Ra expects retail inflation to stay elevated at 6.8% in August 2022 due to high inflation in cereals and services. Furthermore, the agency expects the central bank to continue with rate hikes in the range of 25bp-50bp in the remainder of FY23, but it would be data-dependent.

Inflation has been raging globally due to high food and energy prices. This is prompting major central banks to pursue a tighter monetary policy which is impacting global growth. The International Monetary Fund recently in its July 2022 update of the World Economic Outlook downgraded the forecast of global GDP growth to 3.2% for 2022 from 3.6% earlier.

Liquidity in banking system at a multi-year low

The liquidity in the banking system declined to 0.45% of net demand and time liabilities in July 2022 which is a 37-month low (June 2019: 0.40%), led by a combination of factors such as tightening of monetary stance, robust growth in credit demand and use of foreign exchange reserves (around USD14 billion) by the Reserve Bank of India to manage rupee.

The forex reserve also declined to USD573.87 billion as on 29 July 2022 from USD588.31 billion as on 1 July 2022.

Although the cost of borrowing for the union government softened to 7.39% in July 2022 from a 38-month high of 7.49% in June 2022 due to the softening of global commodity prices, the downward movement in the liquidity is keeping upward pressure on the G-sec yield. The borrowing costs of the union government in July 2022 were 15.1% higher than the pre-pandemic level (February 2020: 6.42%).

Disclaimer: This article is based on an Ind-Ra report with some minor editing. The views and recommendations given in this article are those of the rating firm. These do not represent the views of MintGenie.

Article
This is the relationship between economy and financial markets 
First Published: 09 Sep 2022, 11:31 AM IST