Rate Cuts Alone Will Not Work While Tackling Current Slowdown: SBI
The Current slowdown in Indian economy cannot be tackled by monetary policy in isolation and instead fiscal policy needs to be a major focus now, especially given what low or negative interest rates mean for the sustainability of deficits, says a research note.
 
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI), says, "We believe monetary policy could only act to some extent - experience shows we have been in an era of low interest rates for a decade but that has done little to boost aggregate demand but increasing household debt (in US it increased from $12.5 trillion in Q1FY08 to $13.9 trillion in Q22019). Rather fiscal policy needs to be a major focus now, especially given what low or negative interest rates mean for the sustainability of deficits."  
 
In India, the real interest rate (RIR) has increased to 3.39% in March 2019 from 1.72% in March 2018, though, currently, it stands at 2.19%. A country-wise analysis of real interest rates indicates that India has one of the highest level of RIR. Our empirical analysis suggests that long-run effect of RIR on the savings rate is negative and statistically significant at the 1% level, SBI says.
 
 
Interestingly, according to the report, total financial liabilities of Indian households have jumped by a massive 58% in FY17-18 to Rs7.4 lakh crore after 22% jump in FY17-18. 
 
In fact, while household leverage has jumped two times in the past five years, disposable income has jumped by only one and a half times, thereby putting pressure on savings. 
 
"Even though the jump is not as much as in 2007 (when it jumped by 2.3 times over 2005), such a large jump is a matter of concern. Given such a large jump in household leverage, the question is will monetary policy retain the effectiveness through large rate cuts in current scenario? Probably not and only a counter cyclical fiscal response might address the core of the current problem. A fiscal policy tool could solve both consumption and savings problem," SBI says.
 
 
Emphasising the need to increase savings through fiscal means, Dr Ghosh recommends abolishing capital gains tax to boost financialisation of savings that gained momentum in FY17-18, but might have lost pace in FY18-19. 
 
He says, "It is widely argued that a large part of financial savings of the households is used for financing of fiscal deficit. But this only tells one part of the story, as the incremental claims of government borrowings on households have increased by only Rs60,000 crores for the two-year period ended FY16-17. During the same period, the move to incentivize household savings through increasing the ceiling of Section 80C resulted in an incremental Rs1.8 lakh crore of household savings flowing into tax saving instruments."
 
SBI says, to increase consumption, the government must address demand weakness by continuing to meaningfully frontload expenditure, say, through PM-KISAN and MGNREGA. 
 
For example, the PM-KISAN portal shows the number of beneficiaries is only 68.9 million till July 2019 against the target of 146 million due to slow validation in farmer data) The other option is to continue pursuing capital expenditure as only 32% has been utilised till date. 
 
 
"However, in such a case, the Government should clearly state upfront that the additional fiscal spending is specifically for infra spending to boost demand and not for any unproductive purposes," it added.
 
SBI feels that the headline fiscal deficit should stay at 3.3%, while the additional fiscal impulse for infrastructure spending could be over and above this. 
 
In addition, to negate any impact on bond markets, the Reserve Bank of India (RBI) could also frontload large rate cuts in October policy and also start doing open market operations that will keep the yields in check. "We also believe that the government should go ahead with the sovereign bond," he added.
 
According to SBI, there is a need identify alternate sources of funding for infrastructure. In this context, it says, setting up of a development financial institution could be an effective solution.
"Introduce a performance linked compensation scheme for banking sector employees as well as operational flexibility to hire from market. The wage agreement has been delayed for a long time and a quick announcement before the festive season would help improve sentiments significantly. Address the Insolvency and Bankruptcy Code (IBC) issues more forcefully. Use credit information for consumers and micro, small and medium enterprises (MSMEs) for faster loan disbursement," the lender concluded.
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    COMMENTS

    Chirag Babrekar

    4 weeks ago

    test

    REPLY

    Chirag Babrekar

    In Reply to Chirag Babrekar 4 weeks ago

    test

    balakrishnan

    4 weeks ago

    Dr Ghosh is right . Mergers of banks and monetary policy cannot help. fiscal management has badly sufferred.

    SuchindranathAiyerS

    4 weeks ago

    This Maunmohanomics emphasis on boosting consumption at the cost of productivity and the productive has exacerbated the Nehruvian Socialism Trend since 1947. As a result, India, a command economy, unable to compete on price and quality internationally, is building up an enormous trade deficit by importing goods and exporting wealth. Leveraging this is not going to yield a stronger economy or an uptick.

    SuchindranathAiyerS

    4 weeks ago

    My position since the time GST was first mooted is that GST should be a flat 15 % on all goods and services, and that the introduction of GST should sound the death knell of direct taxes and all other cesses, taxes, CSR, etc etc by whatever name, and be promulgated simultaneously with a law that makes bribe taking an act of treason and a capital offense while decriminalizing the victims of extortion (aka “the bribe givers”).

    The Government’s apprehensions that the resulting revenue will be inadequate should be met by the State with austerity and more refined expenditure prioritization that cuts its coats to suit the cloth until the cloth grows bigger.

    Most particularly, the State should cut back on the large numbers of over paid, incompetent, extortionists on State Pay Roll by at least 75% and replace them with competent persons who can each do the work of a hundred Constitutionally Certified Congenital Cretins and do away with all laws and regulations that stand in the way of such retrenchment.

    However, India’s tyrants, Modi, Jet Lee's ghost, Sitharaman and the Babucracy (aka Kleptocracy) are driven by the imperative to steal from the “haves” for the “have lots” (themselves) in the name of the “have nots”.

    The Modus Operandi of Indian “Governance” beginning with Ashoka, with egregious exceptions such as the Vijayanagar Empire and their Palegars such as Mysore, Travancore, Puri and so on, has been to loot, plunder, rape and massacre as much as possible.

    This exercise continues unabated.

    The Bharathiya Jhumla Party is all about “appearances” rather than substance. Like using turbans to cover up empty heads reflecting a lack of education.

    So they tweak statistics, wage war on the rate of inflation, attempt to stoke car sales and so on without addressing the underlying causes of impending economic collapse.

    The real reason why India is in bad trouble is that Modi and gang have continued all the Nehruvian Socialist policies that have failed since 1947 and UPA (Maunmohanomics) with shock and awe tactics of their own. They have gone about merrily distributing doles, entitlements, privileges, perks, increments and stoking corruption while unleashing computer assisted bureaucratic viciousness by way of Draconian laws, regulations, rules, fines, prisons terms, forms etc without exacting any accountability, whatsoever, from India’s moribund, incompetent, corrupt, judiciary, bureaucrats, police, and politicians.

    They have been promoting consumption while punishing the productive and garnering even more capital and human resources outlay to the Non Productive control of the State. Aadhar, Traffic Fines, Demonetization, GST, Retrospective Laws, Tax Code etc etc.

    Modi has delivered far more Government and far less Governance than the Khangress. India is more of a command economy now than it was under Nehru or Indira Gandhi.

    RBI May Cut Repo Rates by 40bps Next Month as GDP Growth Slows Down to 5%: SBI
    India's gross domestic product (GDP) growth has slowed down to 5% in first quarter (Q1) of FY2020 from 5.8% in Q4 of FY2019 due to slowing down of consumption, low automobile sales, deceleration in air traffic movements and declining government capex. Under the circumstances, the Reserve Bank of India (RBI) may take the repo rate below 5% during the current fiscal, says a research note.
     
    In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI) says, "We expect RBI to frontload rate cuts in October policy and cut rates by 40 basis points (bps). We also expect RBI to take repo rate below 5% in the current fiscal. However, we still believe, monetary policy can only work up to an extent and aggressive rate cuts may not propel credit demand. 
     
    In this context, we point out the similar conundrum regarding the possibility of whether goods and services tax (GST) cuts will rev up auto demand. Echoing the same logic, the question is if GST cuts are uncertain, whether interest rate cuts could also be uncertain in current circumstances!"
     
     
    SBI's leading indicators show an acceleration of only 30% indicators in the month of July (Q2) as against 35% acceleration in Q1 FY20 when the GDP growth was 5%. "We are now estimating GDP growth at 6.1% in FY20, with a clear downward bias. We believe that RBI could now frontload rate cuts of 40 bps in October policy," the report added.
      
    The August 2019 consumer price index (CPI) inflation printed at 3.21%, but stripping aside gold and silver, CPI inflation actually declined in during the month to 3.03%. Core inflation was at 4.25%. 
     
     
    SBI sees FY20 CPI to average at 3.4%. However, it says, given the rainfall scenario, it is hard to determine the exact course of production of major crops like rice, wheat, pulses and oilseeds as both excess or deficit rains are not good for production and it has witnessed an uneven distribution of rainfall this year. 
     
    Though the overall monsoon is 3% more than the LPA or normal, the spatial distribution is quite uneven. Of the 16 major states, 10 states have either deficient rains or excess rains. Only six states received normal rains. This, the report says, will have major impact on food grains production and subsequently on CPI inflation and procurement policies of Government.
     
     
    In North, East and West India almost all the states barring Punjab and Rajasthan received deficient rainfall which might negatively impact price and wheat production. Central India, on the other hand, received excess rainfall where pulses and oilseeds are the major crops. 
     
    Only the Southern states received normal rainfall but these are the states where cash crops are primarily sown. However, it is likely that food grain production in current fiscal will be better than earlier estimates. It is thus imperative that government does effective procurement of crops, the report says. 
     
    The data on quantum of food grain procurement by government agencies shows that 38% rice and 36% of wheat and 8% of pulses have been procured out of their total production in 2019, while for pulses there is a slowdown in procurement in 2019 compared to previous year. 
     
     
    SBI says, "Given the slew of measures the government is announcing for several sectors, it is also imperative that the rural sector gets due attention. We estimate that the actual impact of minimum support price (MSP) pass through during July 2018 and August 2019 has been a negative 26 basis points. The declining trend is clearly showing that there has been inadequate procurement happening on the ground. In this context, Government can instruct that model agricultural produce and livestock marketing (APLM) Act of 2017 is implemented by all the states within a specified timeframe." 
     
    For August 2019, the wholesale price index (WPI) data will come in couple of days and SBI says it expect core WPI to turn negative at (-) 0.12% after exhibiting continuous fall from a high of 5.16% in October 2018. 
     
    "The negative core WPI is eventually conveying weak pricing power. As such, on the growth front, we are now estimating GDP growth at 6.1% for FY20, with a definitive downward bias. Also, the July 2019 index of industrial production (IIP) numbers, look better than June 2019 with June IIP now revised downwards to 1.2%. The good thing, is that GDP growth for Q2 might just be a tad better, with a favourable base and thus Q1GDP could be the trough!" SBI added.
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    raj lee

    4 weeks ago

    Keep cutting repo rate and let poor people die and corporate can live for ever. Those who living with FD as main income should die soon. Rbi is useless any more it works for banks and corporates not people any more. Why so many intreat rate cuts??????!!

    To Revive the Economy, We Must Swallow the Bitter Pill
    The US Fed rate cut last month signalled that the world economies linked to the US dollar are under stress. Also, the  International Monetary Fund (IMF) cut global gross domestic product (GDP) expectation from 3.2% to 3.1% while India’s GDP slowed down to 5% in the second quarter this fiscal. The debate and discussion in the media has been on: are we heading for a recession or has the economy hit a slowdown as a natural phenomenon of the business cycle?
     
    Growth rate of the Indian economy is linked more to the agriculture and services sectors than to others. But the precipitous fall in business confidence and consumer confidence indices, slowdown in savings and investment rates and in capital  formation signal the necessity of corrections on different fronts. 
     
    A fall in the growth of real estate, automobiles and core sectors warranted policy corrections. It is, however, doubtful whether a stimulus is required. Moody’s expects the growth of the economy to be at 6% in the current fiscal. A 6% GDP growth, in an overall depressing scenario in the rest of the world, should be seen as encouraging but that does not leave any room for complacence. 
     
    The IFO World Economic Survey, released every quarter, says in its recent statement: “In the emerging and developing Asia, the climate indicator fell, from +2.1 to –12.1 balance points. This figure mainly reflects the negative developments in China and India. The ASEAN-5 countries (comprising Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) saw a renewed downturn in their economic climate, from 34.6 to 21.3 balance points. The present economic situation continued to deteriorate but remained at a satisfactory level. The best economic climate is reported for Malaysia and the Philippines.” Malaysian Ringgit, it says, is undervalued vis-à-vis US$.
     
    INFLATION RATE 
     
    Retail inflation in India fell to 3.15% year-on-year as of July 2019, less than the RBI (Reserve Bank of India) inflation target of 4%. A growing economy should be having a healthy inflation index. High growth rates in the past were achieved against high inflation rates. 
     
    An alarming rise in inflation to 12.17% in 2013 provoked the RBI to take stiff measures to bring it down to the inflation expectation target. Deflationary trend will send negative signals for growth. A comparison between India and China in terms of Inflation rates indicates peaks and troughs but does not cause the economy to shrink to lows, bringing it close to recession. 
     
    On the retail price front, inflation accelerated to a nine-month high, though remained moderate and below its long-run average. If we can maintain at the RBI an expectation at 4%, that is a rise of 0.75 in the inflation rate, the economy will bounce back to a growth level of average 7%. 
     
     
    GDP Per capita 
     
     
    Comparing with US dollar, per capita GDP in India was 2104.20 in 2018, which is equivalent to 17% of the world’s average and it was at a record low of $330.20 in 1960. 
     
    Poverty index also fell to a low of less than 20%, going by the NITI Aayog data. Bourgeoning middle class and conspicuous consumption would not disappoint the retail markets, particularly the fast moving consumer goods (FMCG) sector. This would mean that the slowdown would be a temporary phenomenon.
     
    Consumer Confidence Index
     
    Consumer confidence in India fallen to 95.70 index points in the third quarter of 2019 from 97.30 in the second quarter of 2019. It is way below the average of 103.10 for the period from 2010 until 2019. It has been falling since demonetisation but started rising till the second quarter of 2018. Thereafter, the fall has been precipitous. Reversing this requires more than pep talk. 
     
    The goods and services tax (GST) has a sagging effect not merely on micro and small enterprises but also on consumers. While it has brought about the much needed business discipline and tax compliance, input credit delivery suffered gradually eroding the confidence in the system. This needs reversal sooner rather than later. 
     
    Bank mergers contributed to the erosion in consumer confidence. Mergers led to distancing the reach of banking to the people, notwithstanding the new initiatives like the small finance banks, postal bank, small payments bank, Rupay card and Micro Units Development and Refinance Agency Ltd. (MUDRA). 
     
    The speed of service through technology is different from the reach. Caring for customers has vastly eroded in the banks. Apps may be attractive but difficult to access for the semi-literate rural clients. If growth of the services sector is declining, financial services has a major contribution to this failure. This needs quick reversal.
     
    BUSINESS CONFIDENCE INDEX
     
    The business expectations index (BEI) fell to 112.8 in the second quarter of 2019-20 fiscal year from 113.5 in the previous three-month period. The index in India averaged 117.74 from 2000 until 2019, reaching an all-time high of 127.50 Index in the second quarter of 2007 and a record low of 96.40 Index in the second quarter of 2009.
     
    Ups and downs are part of business cycles. Several states indulge in make believe efforts when it comes to projecting ease of doing business. Still, several departments and public sector companies indulge in the procedural rigmarole for paying the bills and releasing the promised incentives. 
     
    It is necessary that all states should revisit their industrial incentives about what they can easily deliver and what they cannot, and whether the incentives are delivering the intended benefits at the right time. Giving rise to undeliverable expectations brings down the business confidence index. This needs correction.
     
    MANUFACTURING NEEDS A BIG PUSH
     
    The IHS Markit India manufacturing PMI (purchasing managers’ index) dropped to 51.4 in August 2019 from 52.5 in the previous month and below the market expectations of 52.2. The latest reading pointed to the weakest pace of expansion in the manufacturing sector since May 2018.
     
    Output rose the least in a year and new order growth slowed to a 15-month low, with overseas sales increasing at the softest rate since April 2018. Backlog of works and project delays continued. Employment levels continue to cause concern with not so good results seen even against the huge investments made in skill development. 
     
     
     
    Technology and markets are growing at a rapid pace, throwing up new opportunities. More than 75% of global growth in output and consumption is in the emerging markets. Hi-tech advancements, like the industrial Internet of Things (IoT), machine learning (ML), artificial intelligence  (AI), though they have become buzz words in the industry, they are yet to catch up in all the segments of manufacturing. 
     
    Some of the announcements like relaxations in foreign direct investment (FDI) policy touching retail and media, government junking old vehicles and replacing them with new ones will trigger a demand in auto sector only marginally. Cost-cutting across the supply chain remains a major priority. 
     
    Addressing the workforce skill gap remains a challenging priority. Manufacturers can address the skills shortage by forming partnerships with schools, associates and even competitors to train and recruit talent at an early stage.  But rhere exists a gap in the confidence of industry to partner with educational institutions, irrespective of the emphasis that prime minister Modi and several state governments, like Telangana, have laid on it.
     
    Though labour code has been introduced with the consolidation and rationalisation of 12 labour laws, the increased burden of social security and minimum wages requires re-engineering of business processes and restructuring of organisations and this may require some more time. 
     
    In order that the industry develops its own push-pull measures, tax-breaks can be planned by the government for research and development. Corporate social responsibility (CSR) targets can also be dovetailed for a soft touch to the markets. When the morale is sagging, demand generation is hard to come by. Every measure from the government addresses just one or the other key component of manufacturing investment. It needs to be a facilitator and catalyst rather than pumping money into the economy. 
     
    The areas where it should pump money are public investments in infrastructure and fast delivery of contract payments. Quick credit of input tax on payment of GST will also help. But unless state governments also come on board, avoid wasteful expenditure, monitor all their investments for quick results on an on-going basis and review the situation periodically through accredited third-party agencies, it will be difficult to reverse the slow growth. 
     
    (The author is an economist and risk management specialist. He can be accessed at www.yerramraju1.com)
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    COMMENTS

    K V RAO

    1 month ago

    Economics topics are really a tamasha. Till 2013, mostly during UPA-1&2, we were worried about high inflation and RBI was shooting over the roof about this phenomenon. Since 2014 to date, RBI wants inflation target of 4%to be achieved. Is it not a tamasha? Layman who goes through inflation news would be shocked when economists call for higher inflation. Economics is not only a dismal science but also a confusing one. Of course, experts can always shut our mouth through difficult-to-understand postulates. There has always been debatable stuff and no wonder, when 6 economists gather, seven opinions may emerge.

    Hemant

    1 month ago

    "A growing economy should be having a healthy inflation index." Didn't understand this logic as USA supposed to be strong economy with low inflation.

    Ramesh Poapt

    1 month ago

    Govt is aware of this and subject to limitations, further
    steps are in the pipeline. it may take 2-3 quarters to
    lift the spirit.

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