Top news of the week
Making sense of the Indian growth story
- Global factors, energy prices play spoilsports
Barely a week after the World Bank lowered its economic growth forecast for India (to 8% from 8.7%) and the whole of South Asia, UBS has now revised its growth forecast for FY 2022-23 by 70bps to 7%. If you remember our main story in last week’s newsletter, we had cited certain key factors that acted as bottlenecks to growth. UBS has cited a set of similar concerns including slowing global growth due to high commodity prices and weak domestic demand due to increase in energy prices, inflationary pressures and a struggling job market.
- Rural consumption splutters
Rural India witnessed a spurt of growth in FY 2021-22 with reverse migration and timely government intervention that put money in the hands of the poor through multiple direct benefit transfer schemes. However, while Urban consumption has witnessed an uptick with the reopening of the economy, rural consumption has been sluggish owing to an impact on disposable income and inflation. The recent increase in farm input prices have not helped either.
Higher prices and changed consumer behaviour during the second severe Covid wave (which has led to a ‘conserve cash’ policy in households) suggest that this slowdown is not led by poor income. Trends in the automobile sector too highlight weakness in rural demand. Data shows that though auto retails in India in FY22 rose 7% year-on-year, the two-wheeler segment, an important indicator of the rural economy’s health as nearly half of all two-wheelers are sold in rural areas, showed the lowest growth in FY22.
A silver lining may emerge from the disruption of global food supply chains, read a research note by Prabhudas Lilladhar. Higher agricultural commodity prices, opening up the potential for exports, coupled with normal monsoons in India, could lift rural sentiments.
- RBI actions
While the RBI’s monetary policy committee kept rates steady in its recent policy review in April, UBS expects RBI to hike rates starting June 2022 and sees the MPC cumulatively hiking repo (policy) rate by 100 basis points (bps) to 5 per cent by FY23-end. If the oil price shock persists for longer, the RBI would have no choice but to let the rupee weaken. UBS’s sensitivity analysis indicates a 5 per cent rupee depreciation would boost growth 15 bps and could increase inflation by 20 bps.
The RBI has also revised its earlier “Growth First” stance – “Circumstances warrant prioritising inflation and anchoring of inflation expectations in the sequence of objectives to safeguard macroeconomic and financial stability, while being mindful of the ongoing growth recovery,” Governor Shaktikanta Das wrote in the minutes of the latest MPC. As retail inflation accelerated to nearly 7% year on year, the highest in 17 months and above the upper limit set by RBI for a third straight month, several market participants expect the RBI to change its stance to neutral in June and start raising the repo rate in August. Some are even of the opinion that this can even happen in June if inflation continues to surprise on the upside.
- So is the India story intact?
Despite all the woes, India’s fundamentals remain intact. India has emerged from the pandemic faster than some of the developed economies and has been a resilient performer. With comfortable foreign exchange reserves, buoyant tax revenues, growth oriented government policies aimed at enhanced public spending and attracting private investments, policy interventions with regards to the rural sector and the government’s overall digitisation push to bring in efficiencies and transparency are expected to bring in jobs and higher per capita income. These interventions, while significant, will yield results over a period of time and till then inflation is a problem that India has to solve for in the short term. If we manage to wade through these uncertain times with some deft maneuvering, structural drivers are in place that will ensure a sustained long term growth for the Indian economy.
MSME – Mid-teen growth expected in FY 2022
The latest ASSOCHAM-CRISIL joint study says that the MSME sector is expected to achieve mid-teen growth in the fiscal year 2022 with the pick up of economic activities.
MSME segment in India is estimated to have 6.3 Cr units, employing over 11 Cr. people. The sector accounts for 27% of the GDP and plays an important part in employment generation, exports and lending opportunities. The report notes that if MSME lending by banks and NBFCs in fiscal 2021 rose to 7%, then credit is expected to grow by 7-9% in fiscal 2022 supported by favourable government measures and increase in demand. The increase in digital footprint within the MSME sector has not only helped with increased customer experience, operational efficiency and workforce enhancement, but also facilitated wider access to financial services
Other Highlights of the Week
India processes digital transactions worth ₹20,000 crore a day
In his monthly Mann Ki Baat radio broadcast, Prime Minister Narendra Modi said small online payments are helping build a big digital economy and many new fintech startups are coming up. “Now digital transactions worth Rs 20,000 crore are taking place daily in our country. In March, UPI transactions even reached Rs 10 lakh crore,” he said.
LIC IPO
LIC now plans to offer 3.5% equity in its IPO planned in May. The company is likely to be valued at Rs 6 lakh crore and a 3. 5% dilution will mean an offer size of Rs 21,000 crore. Earlier estimates had pegged the IPO issue size at Rs 60,000-63,000 crore. However, with markets turning choppy, there is a sense that a bigger issue would be difficult to sell.
Digital banks showing weaknesses in their financial crime defenses, UK regulator warns
The U.K.’s Financial Conduct Authority warned that some challenger banks are failing to adequately assess the risk of financial crime when onboarding customers. In some cases, challenger banks did not have customer risk assessments in place to begin with, the watchdog said. Fintech firms are under pressure to improve their financial crime controls, particularly in the wake of sanctions imposed on Russia over its invasion of Ukraine.
