India’s Trend Rate Of Growth Is Faltering, Cautions Nomura’s Sonal Varma
Through the last few business cycles, trend rate of growth for the Indian economy has been declining, says Nomura’s Sonal Varma.
A GDP growth rate of just 5 percent in the quarter ended June prompted much concern among policymakers and economists. However, India may need to look beyond quarterly growth rates and address its slowing trend rate of growth, said Sonal Varma, chief India economist at Nomura Global Market Research.
Over economic cycles, India’s ability to sustain a high rate of growth has declined, Varma told BloombergQuint.
We’ve had multiple business cycles in India over the last 10 years but they are around a moderating trend growth. While we can get another cyclical uptick if we keep easing monetary policy, that is clearly not sufficient to turn around trend growth, which requires investment to pick up. I think that remains an unsolved part of the question and puzzle for India.Sonal Varma, Chief India Economist, Nomura Global Market Research
Varma, who expects GDP growth for the ongoing fiscal at 6 percent, said there would be some uptick in the economy in the second half of the year. This recovery would be led by the impact of the significant monetary easing already announced.
India’s Monetary Policy Committee has cut rates by 110 basis points so far in 2019. Varma expects another 40-basis-point cut this year, taking the cumulative easing to 150 basis points and the benchmark repo rate down to 5 percent. The transmission of these rate cuts is picking up now with liquidity remaining in surplus.
At an aggregate level, the monetary easing will start to help the economy. Monetary easing does take two-three quarters to have an impact on the cyclical sectors of the economy. Based on that, we are getting closer to the turning point.Sonal Varma, Chief India Economist, Nomura Global Market Research
While easing of monetary policy will aid the economy, room for any fiscal support remains limited.
The Rs 1.76-lakh-crore in surplus received by the government from the Reserve Bank of India will not help significantly, as much of it will be needed to cover an emerging fiscal gap, Varma said.
Slowing nominal growth, which fell to a 15-year-low in the first quarter of FY20, will have a negative impact on tax revenues. Even with the additional revenue received from the RBI, the government may struggle to meet its fiscal deficit target, Varma said.
The tax hole at this stage is running at close to 0.5 percent of GDP. The dividend over and above the budgeted amount is taking care of roughly half that shortfall. So there is still a 0.25 percent of GDP fiscal gap to be filled to get to the 3.3 percent fiscal deficit target.Sonal Varma, Chief India Economist, Nomura Global Market Research
Understanding The Consumption Slowdown
Commenting on the causes behind the sharp slowdown in private consumption expenditure, Varma said the Indian economy has been hit by a series of shocks.
India is seeing an impact of weak rural incomes, slowing employment growth, the shadow banking crisis and the synchronised global slowdown, Varma said. On top of that, “we have weak confidence levels, which is also causing postponement of consumption demand. Its a mix of various shocks”, she said.
Both agricultural and non-agricultural sources of rural income have been weak... On the urban side, in the last 12 months, you have seen oil prices go up, the rupee depreciated, banking liquidity tightened and cost of capital rose. Along with that we saw the NBFC crisis. A combination of that had already set the stage of weak discretionary demand. While this was playing out, the global shocks also hit us via the confidence channel.Sonal Varma, Chief India Economist, Nomura
According to Varma, some of the course correction on the policy side has happened and this will help the cyclical segments of the economy revive. The first quarter is most likely to be the “trough” quarter, said Varma, adding the pace and extent of recovery will be key.
Watch the full interview here: