IMF, World Bank are right; indicators point to 2023 GDP growth challenges

After the World Bank, the International Monetary Fund (IMF) has cut down India’s growth forecast for FY23 to 6.8% – from 8.2% in April and 7.4% in July – even while keeping global growth prospects unchanged at 3.2%. That is not all. The IMF’s downward revision for India since April 2022, after the Russia-Ukraine war broke out, is the maximum at 1.4 basis points. While for the world it is 0.4 points, for advanced economies 0.9 points and for emerging economies (India’s peers) 0.1 points. Earlier, the World Bank cut India’s growth from 8% to 6.5% in the same period.

This is in keeping with India’s growth tanking to -6.6% in FY21, the first pandemic year, when the pandemic’s impact was far less on the rest of the world – world growth at -3.1%, advanced economies at -4.5% and emerging economies at -2%.

What did the IMF see that India hasn’t? The RBI has cut India’s growth by a mere 0.5 points, from 7.5% to 7%, during the same period, which is supported by the Chief Economic Advisor (CEA) and a member of the Economic Advisory Council to the Prime Minister (EAC-PM). The IMF says it has cut India’s growth prospects due to two reasons: (i) “weaker-than-expected outturn in the second quarter and (ii) “more subdued external demand”.

Closer scrutiny of India’s economic indicators shows the IMF is closer to ground realities since the basis for the optimism of the RBI and economic advisors either (a) lacks substance or (b) shows a distinct declining trend that they overlooked. There is a third factor (c) which too has been overlooked – first a weak monsoon causing drought-like situation in several major grain producing states, followed by heavy downpour from a lingering/delayed monsoon in the months of September and October, both causing extensive damage to crops.

Noticeably, IMF director Kristalina Georgieva listed “climate disaster on all continents” as the third big factor, along with pandemic disruptions and the war, for the recessionary trend in the global economy.The IMF has cut down 2023 growth to 2.7%, from 2.9% earlier.

The RBI’s optimism, expressed in its latest monetary policy statement (MPC), is based on its positive assessment of several factors: “buoyant” tax collections, “improving” agriculture outlook and rural demand, “rebound” in services, “rising” capacity utilisation in manufacturing, “pick-up” in non-food credit, “boost” to private investment from government’s capex push, “healthier” corporate balance sheet, “sharp corrections” in crude and commodity prices, festival spending etc. to push 7% growth.

These factors do not stand scrutiny. Here is why:

High tax collection and sectoral growth

High GST collection is often hyped up. The latest official statement says, until September 2022, the GST collection crossed ₹1.4 lakh crore in all seven months of FY23 and that total collections in FY23 up to September is 27% more than the corresponding of FY22.

What the statement doesn’t reveal is that it is largely due to high inflation and surge in import driven by higher commodity prices – rather than growth in consumption per se – making the surge in tax collection superficial. Here is a simple calculation. How much does the GST from import (part of IGST) contribute to the overall GST collection? It (import component) was the largest component of the GST in six out of the last seven months of FY23 (except April). It contributed, on average, 26.9% to the total GST.

The other is about gross direct tax collection (corporate income tax and personal income tax). Up to October 8, 2022, official statement says, direct tax collection went up by 23.8%, compared to the corresponding period of FY22. In this, corporate tax was up by 16.7% and personal income tax, including security transaction tax (STT), by 32.3%.

The latest industry estimate says, for the top 50 companies (Nifty50) Q2 of FY23 is likely to mark the end of unprecedented rise in corporate profits after the pandemic hit in 2020. The net profit of ₹1.38 lakh crore in this quarter is less than ₹1.46 lakh crore in the corresponding previous quarter of FY22. The Q2 net profit is also a first year-on-year decline after eight consecutive quarters. The decline is attributed to demand slowdown, moderation in commodity prices and margin contraction in IT, FMCG and cement.

Personal tax collection is unlikely to go untouched as growth slows down after 13.5% in the first quarter – which is well below 16.3% of RBI’s projection. From now on, quarterly growth rate will progressively plummet even by the RBI’s calculation to 6.3%, 4.6% and 4.6%.

Apart from the monsoon’s repeated havoc this year, rural demand remains muted. A recent report of Edelweiss Securities found no sign of pick-up in rural demand.The services sector, as per the S&P Global India’s PMI, has seen growth slipping to a six-month low in September due to a substantial fall in demand and high inflation. Industry too is losing steam.

Latest data on the growth in core sector of industry (coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity), which comprise 40.3% of industrial production (IIP), shows it slipped to a nine-month low at 3.3% in August 2022 (after 3.1% in November 2021). Overall industrial production (IIP) also shrunk to -0.8% in August – a first in 17 months and in a month which should have seen pre-festival ramp up in production. Further, capacity utilisation in manufacturing fell to 72.4% in Q1 of FY23, from 75.3% in the previous quarter – indicating slipping demand and plenty of idle capacity to attract investing.

Capex down, credit growth to industry near zero

The hype over capex and higher private investment hopes are misplaced too. CMIE’s Mahesh Vyas has repeatedly busted this myth. When the Centre’s capex push was hyped as the panacea for boosting private investment in 2021, he revealed shocking details. He wrote new investment proposals (public and private sectors) continued to fall sharply from FY16 (by 30%) – from quarterly average of ₹6 lakh crore in FY15 and FY16 to ₹4.2 lakh crore in FY19 and FY20 (pre-pandemic).

It further dipped in FY21 to rise in FY22, but as the CMIE data base shows, Q1 and Q2 of FY23 saw consecutive falls – to ₹4.39 lakh crore in the first and ₹3.27 lakh crore in the second quarter, from ₹8.48 lakh crore in the last quarter of FY22. The RBI’s optimism of investment picking up is based on old data, that of FY22 – which, it admitted, was still below the FY20 level. Private investment has been on a prolonged slowdown – private sector GFCF down from 16.8% of the GDP in FY08 to 9.2% in FY21 (up to which data is available). This was explained earlier in Fortune India’s article “Is India’s capex cycle on revival path?

As for the Centre’s capex push – 33.7% of the budgeted ₹749,652 crore for FY23 already spent by August 2022 – is a marginal improvement (31% in FY22 until August) and is more likely to stall going forward for two main reasons: (i) extension of “free” ration for three months entails additional expenditure of ₹44,000 crore (ii) additional allocation of ₹1.1 lakh crore for fertiliser subsidy due to the war-induced supply constraints (taking the total to ₹2.15 lakh crore for FY23) and (iii) additional allocation of ₹22,000 crore as one-time grant to fuel retailers (PSUs) to cover loss on LPG sale. In any case, at 2.9% of the GDP (FY23 BE), the Centre’s capex can’t be considered a major growth booster.

Credit outflow inverted in FY20

The pick-up in credit outflow to non-food is also grossly misleading.
Credit outflows had inverted way back in the pre-pandemic FY20. Instead of “large industry” and “industry” driving the credit growth, it is “personal loan” – loans by individuals to buy consumer durables, houses, vehicles or fund health and education expenses etc. – which is driving it.

For “large industry” the inversion happened in FY20 and continued in FY21 and FY22. In FY20, total credit to “personal loan” outstripped large industry for the first time since FY08 – the period for which the RBI provides data. The gap (between credit to large industry and personal loans) widened from ₹1.4 lakh crore in FY20 to ₹9.8 lakh crore in FY22. The trend remains unchanged in FY23 for all months between April and July (up to which data is available). The gap jumped to Rs 11.9 lakh crore in July 2022!
As for “industry” (of which large industry is a part), the inversion happened a year later in FY21 and continued in FY22. In FY23 too, the trend persists with the gap (in credit to industry and personal loan) in July going up to ₹4.1 lakh crore.

Not just in absolute numbers, the RBI data reveals that it is the high growth in personal loan that is driving credit. Growth in personal loan jumped to double digit in FY11 and remains so until now, while that for industry and large industry slipped into single-digit in FY15 and remains so. In FY23, during April-July 2022, the average growth of credit to large industries was 0% (zero) and for industry 0.2%.

Growth in credit for personal consumption may help but when credit growth to industry is near zero, little fresh investment or capacity building can be expected (not to forget industry’s need for “working capital”).
In the meanwhile, the RBI has raised the interest rate (repo rate) from 4% until May 2022 to 5.9%. It would continue to do so because (i) inflation remains above 6% – rising to 7.4% in September, from 7% in August (ii) to keep pace with the US rate hikes to check capital flight and rupee devaluation. The US, the UK, Eurozone have sharply increased rates and would continue to do so to fight four-decade high inflations. Many other countries would also be doing so. Further hike in interest by the RBI would reduce credit outflow and appetite for fresh investment.

As for the oft-cited argument that devaluation of rupee is less compared to many other currencies, an analysis of IMF data on 15 large economies between August 2021 and 2022 shows that except the UK and Japan, others who saw higher currency depreciation than India, had smaller declines in their forex reserve.

That is, the RBI has spent more from its forex to stop rupee devaluation. At $545.5 billion (September 16, 2022) India’s forex reserve may seem comfortable but it has fallen rapidly from $606.5 billion on April 1, 2022. With a growing current account deficit, at 2.8% of the GDP (close to comfort level of 3%) and merchandise trade deficits at 8.1% at the end of Q1 of FY23, that comfort may soon disappear.

India’s exports, a growth driver, have already been impacted by adverse global conditions. Slowing global demand turned the growth in merchandise exports (Y-on-Y) negative (-3.5%) in September 2022 – a reversal of the trend in the past several months. But imports continue to grow (by 5.4%) in September, putting more pressure on forex reserves.

The festive spending offers limited consolation with both August IIP turning negative (-0.8%) and September inflation rising to 7.4%. Besides, as the UBS Securities India’s recently released survey (conducted in August 2022) said, consumption is driven by the top 20% of Indians – 59% in rural areas and 66% in urban areas. A majority of Indians are yet to recover from the pandemic shock, it said.

Until the majority are in, consumption can’t sustain or boost growth much. Private consumption (PFCE) jumping to 59.9% of the GDP in Q1 of FY23 – up from 54% in FY22 – may seem positive indication of revival in consumption but look at it in the overall context: contributions of government expenditure, investment (public and private) and exports have correspondingly fallen, which is not a positive sign.

As the IMF has said, the signs are far more ominous for 2023 – it cut down global growth for 2023 to 2.7%, from 2.9%, even while keeping the growth for 2022 unchanged at 3.2%. A global economic world in recession certainly doesn’t augur well for India’s growth in FY24.