Improved growth track in fiscal 2020
According to the report, BWR Drishtikone, liquidity boosting measures to accelerate rate transmission and boost credit demand Budget proposals and the RBI’s liquidity boosting measures, coupled with previously announced government measures, are expected to bring the domestic economy on an improved growth track in fiscal 2020. Signs of economic revival, such as improved IIP and eight core sector activities, already exist. Furthermore, the Manufacturing PMI showed substantial rebound, with the index reaching an eight-year high of 55.4% in January.
With a 3.5% fiscal deficit target for the next fiscal, the Finance Minister proposes to spend Rs 30.42 lakh crore in 2020-21, which is 12.7% higher than the revised estimate of 2019-20. On the revenue front, out of the estimated Rs 22.46 lakh crore, the government expects to collect 9% of its receipts through disinvestments (Rs 2,05,000 crore) from the sale of a large stake in LIC.
For the current fiscal, the government revised the fiscal deficit target to 3.8%, breaching the target by 0.5 percentage points from its previous budget estimates. In the recent MPC statement, the committee continued to assure a facilitating role to prop-up the economy, by maintaining rates and accommodative stance, despite the CPI inflation reaching 7.35% in December 2019.
The committee’s statement says that there is policy space available for future action hint at further monetary easing, if inflation falls below the 6% level. The RBI is likely to maintain a pause in its next policy actions going by the inflation projection of 6.5% for the fourth quarter (which is above the RBI’s comfort zone).
Additional measures by RBI like incentivising banks for further monetary transmission of rates, linking the pricing of loans by scheduled commercial banks for medium enterprises to an external benchmark, and providing a leeway in CRR (Cash Reserve Ratio) on incremental lending on credit disbursements to certain productive sectors such as auto, housing and MSMEs, likely to improve the credit flow to these sectors. The move also aimed at stabilising and softening yields.
The transmission of past rate cuts, which otherwise remained muted thus far, is likely to materialise in the coming quarter. The collective efforts of the RBI and government are expected to bring better growth prospects in the medium- term for the domestic economy. The nascent recovery signs witnessed in some economic indicators during the recent few months were largely attributed to festive-related demand, base effect, and earlier announced government measures influencing sentiments.
If the trend continues, achieving 5% growth estimated for the current fiscal looks possible. The next release of the second advance estimates of GDP by the Central Statistics Office (CSO), expected to be released by February-end may provide further clarity on the growth projections for 2019- 20, which we expect would be in line with the first advance estimates, as well as Brickwork Ratings estimates.
Economic Survey 2019-20 has estimated GDP growth of 6-6.5% for fiscal 2020-21 expects the economy to gain momentum. We also expect the economy to witness a reversal in a slowdown from the next fiscal, aided by policy initiatives taken by the government and RBI. Geopolitical risks and the expectation of a slow rebound in some key sectors that are currently under stress are major factors that may pose a downside risk to growth.
The effectiveness of the measures taken to address demand is the other variable which can impact growth. Thus, our GDP growth estimates are constrained at 5.5-6% for the next fiscal.
