Quarterly Review of the Economy, 2020:1Q in Coronavirus times May - PowerPoint PPT Presentation

Quarterly Review of the Economy, 2020:1Q in Coronavirus times May 15, 2020 New Delhi

QRE Team Team Members Sudipto Mundle, Bornali Bhandari, NR Bhanumurthy (NIPFP), Anil K Sharma, Pallavi Choudhuri, Rudrani Bhattacharya (NIPFP), Saurabh Bandyopadhyay, Prerna Prabhakar, Sanjib Pohit, Poonam Munjal, Devender Pratap and Ajaya K Sahu Special Acknowledgements Usha Thorat, GC Manna and Anushree Sinha Organisational Support Sudesh Bala, Praveen Sachdeva, Anupma Mehta, Shilpi Tripathi, Sukriti Chauhan, Khushvinder Kaur and Sangita Chaudhary

Outline I. Performance of the Real Economy and Trade A. Real Sector Trends B. Demand-side Trends C. Business Sentiments D. Price Trends II. Policy Simulations III.Macroeconomic Policies A. Fiscal Policy B. Monetary Policy and Credit

Sustained declined in GDP Growth since 2016-17 before coronavirus crisis Real GDP Growth 10 8.7 8.3 8 % change 6 4.5 4 3.0 2 0 Legend: _ Annual; _ Quarterly and _ projections. Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source : MoSPI and NCAER Estimates. Source: CSO

Sharp decline in agricultural growth since Q4: 2017-18 GVA Growth Agriculture 8 6.8 6.5 7 6 5 % change 4 3 2.42.3 2 1 0 0 0 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 Q1: 2020-21 -1 Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates Source: CSO

Steep Decline in Industrial Growth since Q1: 2018-19 Expected decline of (-)27% in 2020-21 and (-)54% in Q1: 2020-21 Growth in Industry GVA 9.6 10.0 9.0 8.1 8.0 7.0 % change 6.0 5.0 4.0 3.0 1.4 2.0 0.7 1.0 0.0 Legend: _ Annual; _ Quarterly and _ projections. Source: MoSPI and NCAER Estimates

IIP confirms continuing industrial slowdown Growth (%) in IIP General Growth (%) in IIP Manufacturing 8 10 6.5 7.5 8 6 4.4 6 4.6 4 4 % change % change 2 2 0 0 -2 -0.7 -1.3 -2 -4 -4 -6 -3.8 -5.8 -6 -8 2017-18 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 2017-18 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 Legend: _ Annual; _ Quarterly and _ projections. Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: MoSPI and NCAER Estimates Source: CSO

Sharp decline in services growth projected for 2020-21 Growth in GVA Services 15.0 9.4 8.4 10.0 6.7 5.3 5.0 % change 0.0 -5.0 -10.0 -8.1 -15.0 -16.3 -20.0 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 Q1: 2020-21 Legend: _ Annual; _ Quarterly and _ projections. Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: MoSPI and NCAER Estimates Source: CSO

Cargo and passenger traffic continue to decline Revenue Earning Goods Traffic and Cargo Air Passenger and Cargo Traffic Handled at Major Ports 25.0 15 20.0 10 5 15.0 0 % change % change 10.0 -5 -2.3 -10 5.0 -1.2 -15 0.0 -20 -25 -5.0 -31.7 -2.6 -30 -10.0 -35 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 Q4: 2019-20 Q1: 2017-18 Q2: 2017-18 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 Q2: 2018-19 Q3: 2018-19 Q3: 2019-20 Q4: 2019-20 Total Air Passenger Traffic (%yoy) Revenue Earning Goods Traffic (%yoy) Total Air Cargo Traffic (%yoy) Cargo Handled at Major Ports (%yoy) Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Legend: _ Annual and _ Quarterly Source: CSO Note: The data for Air traffic are from January-February 2020. Source: CMIE and Airports Authority of India.

Consumption demand declining sharply Growth in IIP Consumer Durable and Non-durable Goods 20.0 16.2 15.0 8.1 10.0 % change 5.0 0.0 -1.9 -5.0 -10.0 -9.1 -15.0 IIP Consumer Durable Goods IIP Consumer Non-durable Goods . Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source: MoSPI Source: CSO

Investment demand falling sharply Growth in Real Government Fixed Capital Formation 12.9 14 12 9.8 10 6.5 8 % change 6 4 2 0 -2 -4 -6 -5.2 -8 Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Legend: _ Annual and _ Quarterly Source: MoSPI Source: CSO

Government Expenditure compression reversed after Q1: 2019-20 Real Government Final Consumption Expenditure 14 11.8 12 9.8 % change 10 8.8 8 6.5 6 4 2 0 2015- 2016- 2017- 2018- Q4: Q1: Q2: Q3: 16 17 18 19 2018- 2019- 2019- 2019- 19 20 20 20 Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Legend: _ Annual and _ Quarterly. Source: MoSPI. Source: CSO

-10 Source : Ministry of Commerce and RBI. Legend: _ Annual and _ Quarterly 20 30 25 10 15 -5 declining since Q2: 2018-19, now 0 5 Growth of Exports of Goods and 2017-18 Exports and imports growth Services (Rs terms, %yoy) 2018-19 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 26.1 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 negative Q2: 2019-20 Q3: 2019-20 -3.9 Q4: 2019-20 -10 -15 20 30 25 35 10 -5 15 0 5 2017-18 Growth of Imports of Goods and 2018-19 Services (Rs terms, %yoy) 2019-20 Q1: 2017-18 Q2: 2017-18 Q3: 2017-18 Q4: 2017-18 Q1: 2018-19 32.9 Q2: 2018-19 Q3: 2018-19 Q4: 2018-19 Q1: 2019-20 Q2: 2019-20 Q3: 2019-20 -4.1 Q4: 2019-20

Business and Political Confidence Indices (NCAER) continue declining in April 2020 Business Confidence Index (BCI) and Political Confidence Index (PCI) 180 160 140 Index 120 100 77.4 80 60 73.7 BCI PCI Source : NCAER 14

Nikkei PMI dropped sharply in April 2020 Indices April 2018 to April 2020 70 60 51.8 50 49.3 PMI 40 30 20 27.4 10 5.4 0 PMI Manufacturing PMI Services Note: RE, 2016-17 are second RE, 2017-18 are First RE, 2018-19 are Provisional Estimates . Source : Nikkei PMI Source: CSO

Inflation trends CPI and WPI 8.0 7.0 6.0 % change 5.0 4.0 3.0 2.0 1.0 0.0 CPI WPI Inflation Rate (%yoy) Source: MoSPI and Office of Economic Advisor

Baseline Assumptions about Disruptions in Key Sectors 2019- 2020- 2020- 2020- 2020- 2019- Sector 2020-21 20:Q4 21:Q1 21:Q2 21:Q3 21:Q4 20 Agriculture 0.0 0 3.0 3.0 3.0 2.4 2.3 Industry 0.7 -54.2 -27.0 -27.0 0 1.4 -27.1 Services 5.3 -16.3 -8.0 -8.0 0 5.8 -8.1 GVA 3.0 -25.7 -12.3 -12.3 0.5 4.4 -12.5 • Negative growth to continue until Q3: 2020-21 and recover modestly to 0.5% in Q4 • For the whole year, GDP growth expected to be (-)12.5% • These are based on assumption of no policy stimulus (either monetary or fiscal) • What could be the impact of various stimulus measures undertaken till now? • Alternative fiscal policy simulations and their impact are assessed using policy simulations model

About the policy simulation model • Core model has 31 equations – 21 behavioral equations and 10 identities • Simple model, cause effect relationships are transparent • It is a demand side model with four major blocks: Income, fiscal, monetary and external • Follows eclectic approach • Flexible, easily adaptable to address different questions • Present version is used for working out macro-fiscal relationships for the 15 th FC • A negative growth of -12.5% for 2020-21 is imposed on the model to derive deficit conditions for the base case • In addition, four possible policy scenarios are simulated to derive GDP growth, FD, Inflation and CAD

Policy Simulations: Four Scenarios Scenario 1 Scenario 2 Scenario 3 Scenario 4 • Starting with • Increase • Increase • Increase the base public public public case, expenditure expenditure expenditure revenue and by 1% of by 3% of by 5% of capital GDP GDP GDP expenditures • Reduce Repo are increased Rate as per the 2020-21 (Budget Estimates).

Policy Simulation Results Fiscal Deficit CAD GDP growth Inflation Scenarios (as % of (as % of (%) (%) GDP) GDP) Base case -12.5 4.5 6.4 1.4 Scenario-1 -4.1 6.6 7.4 2.3 Scenario-2 -1.9 7.4 7.7 2.5 Scenario-3 1.2 8.9 8.8 3.0 Scenario-4 3.6 10.1 9.4 3.6

Key Takeaways: Facing Stark Choices • Fiscal stimulus of 3% (Scenario 3) is enough to generate positive GDP growth • 5% fiscal stimulus (Scenario 4) generates 3.6% growth  This is closest to Government stimulus package.  However, there are trade-offs: this results in double-digit inflation with unsustainable CAD of 3.6%. • The model suggests aggregate demand responds faster to stimulus than aggregate supply, hence, the rise in inflation • Any improvement in supply side could moderate inflationary pressures, but this needs broader policy interventions.