Diwali comes just at the time when the unlock process is probably mid-way through and there is a smell of optimism around as the high frequency economic indicators point upward. The positive thing one can say as we begin Samvat 2077 is that things will look only positive starting now with the only caveat being that we have a normal monsoon next season. It is reasonable to assume that even if there is another wave of the pandemic the response of the government will not be a lockdown. This is the good news.
Most estimates for gross domestic product (GDP) growth or degrowth this year are in the single digit range with CARE estimates being -8.2 per cent and Reserve Bank of India (RBI) -9.5 per cent. Given that growth in Q1 was -24 per cent, it is axiomatically assumed that progressively the growth rates will improve with a positive growth rate being achieved in Q4. This goes along with the rather prudent move by the government to unlock the economy in a calibrated manner. The interesting thing is that right up to Diwali in 2021, the numbers will statistically look very good. This is because the Q1 and Q2 growth numbers in FY22 will be very high as they will come over double digit negative growth numbers in the same period of FY21. The important thing to watch out for, however, will be the pace of job creation as the lockdown has induced considerable layoffs and salary cuts, which must be restored to reignite the consumption cycle.
The second factor to look out for will be inflation. This will be less predictable as it has been driven by the food basket, which is dependent on the supply conditions. The comfort here, however, will be that since CPI inflation has been high this financial year (so far in the range of 6-7 per cent), there will be a high base effect that will moderate these numbers. However, there would be swings in the core inflation component, which is relatively stable in the 4 per cent range and could show a spike in the early part of FY22. As inflation comes down progressively, there will be more space provided to the RBI to lower rates further. While the December 2020 policy is unlikely to witness any rate action, we could expect further rate cuts in calendar 2021 depending on the trajectory of inflation. Another 25-50 basis point (bps) cut in the repo rate cannot be ruled out in 2021. The accommodative stance is also likely to prevail under these circumstances with liquidity provided through the long-term refinancing options (LTRO) and open market operation (OMO) modes.
In Samvat 2077, the Union Budget will be the first big announcement to be made in February and this would be of great interest as several threads have to be woven together. The first is the definition of the trajectory of the fiscal deficit path, which has to probably move backwards from what could be 9 per cent of GDP for FY21. Second, the government will have to seriously look at the relief expenses this year which went as cash transfers, free food and rural employment. It is unlikely that the vaccine will be delivered at the time of presentation of the budget and hence must be provided for in the proposals. Third, the government may have to consider the credit guarantee scheme for the SMEs or other sectors to provide a fillip to the economy. There would be high expectations of the same on this count. Fourth, while the GDP growth next year will be high in the region of 9-10 per cent due to a very low base effect, the same would not translate necessarily to higher tax revenue. Hence, this cushion may not be there to a large extent. Therefore, the budget will assume a very important position in Samvat 2077.
A big comfort will be the external sector that will continue to tick along. The faith shown by foreign investors in these pandemic times has been very assuring and can be expected to prevail in the coming year as well. This, combined with a strong current account, will keep the balance of payments (BoP) steady and make the rupee stable in the upward direction.
The challenge, however, will be for the banking sector that will have to grapple with the hard reality as the cushions provided through the pandemic are withdrawn and the rigorous recognition and provisioning norms are back in play. Non-performing assets (NPAs) for this sector would be in the region of 15 per cent by March 2020-end, and the future course will be camouflaged a bit by the restructuring of loans – both SME and large exposures. This can be the black box for the sector that is still an unknown today.
In this situation with improved economic performance going with better corporate earnings, the stock market will take heart, supported by hopefully a global economic recovery. Therefore, it would be a colourful Diwali next year for sure filled with optimism unlike this year’s muted celebrations which are laced with hope.
Madan Sabnavis is chief economist at CARE Ratings. Views are personal.