Number Theory: Recovery of economy showing mixed signals
Most private forecasts expect the Indian economy to do better than expected in 2020-21 and 2021-22. A research note by Nomura economists Sonal Varma and Aurodeep Nandi projects a GDP contraction of 6.7% in 2020-21 and growth of 13.5% in 2021-22. This is greater than the first advanced estimates of 7.7% contraction in 2020-21 and RBI’s forecast of 10.5% in 2021-22. Equity markets have gained 12.6% since the presentation of the Union Budget, which among other things has increased the share of capital expenditure in total budgetary spending and committed to a higher fiscal deficit to boost growth. An HT analysis of some high frequency indicators that track household financial health and investment demand, however, presents a mixed picture of the economy, a clear indication that while there will be a sharp recovery, it may not be as widespread as some believe.
1) Defaults on retail loans are declining but they remain high
Among the biggest unknowns regarding the impact of Covid-19’s economic disruption has been its impact on household finances. The net effect is likely to be sum of forced/precautionary savings and loss in income/employment. The former is likely to have reduced liabilities, while the latter is expected to have led to depletion in assets or worse, default on existing liabilities. While we do not have a comprehensive database on household balance sheets, information on failed transactions – they capture default on pending payments on monthly instalments, premiums etc – from the NPCI’s-NACH (national automated clearing House) can serve as a useful proxy of this trend. To be sure, experts point out that this database only captures payments related to Non-Banking Financial Companies and therefore is not representative of any change in the retail loan component of non-performing assets (NPAs) of banks. The share of payments which did not come out of total expected payments increased sharply during the lockdown and peaked at 38% in June 2020. While this value has since come down, it is still higher than pre-Covid levels. In absolute terms, the value of payments which did not come on time was ?23,809 crore in the quarter ending December 2020, 1.31 times that in the same period a year ago. Gaurav Jani, banking analyst at Centrum broking said that the increase in default rates in recent months means lowering in earnings of retail loan borrowers. These rates are expected to fall as earnings of retail borrowers improve subsequently, he added.
2) Housing loan growth has been decelerating despite moderation in house prices and interest rates
Housing is an important, and for many Indian households, a once-in-a-lifetime investment. Because construction continues to be among the most important sources of employment outside agriculture – the 2018-19 Periodic Labour Force Survey shows it has a share of 12.1% in employment, the second largest, after agriculture – housing demand is also important for the rest of the economy. The Narendra Modi government is actively promoting the goal of house ownership for all Indian households and the 2020-21 budget announced an additional income tax incentive for affordable housing. These incentives have been continued in the 2021-22 budget. Because interest rates have come down significantly in the post-Covid phase – RBI reduced policy rates by 115 basis points between February 6, 2020 and May 22, 2020 – housing loans have also become cheaper. RBI data on house prices shows significant moderation in house prices. RBI’s house price index is based on transaction-level data received from housing registration authorities in 10 major cities (viz., Ahmedabad, Bengaluru, Chennai, Delhi, Jaipur, Kanpur, Kochi, Kolkata, Lucknow and Mumbai). These developments taken together should have led to a rise in demand for housing loans. However, this does not seem to be happening, as can be seen from growth in outstanding housing loans (including priority sector lending) until December 2020. Madan Sabnavis, chief economist at CARE Ratings, said “the slow increase in housing price indices is indicative of a rather sluggish demand pattern coupled with large stock of unsold inventory”. “As demand for houses grows slowly there is also a tendency for demand for credit for the same to be slow since there have been job losses as well as salary cuts which have not yet been reversed across sectors and companies.”
3) Private sector investment activity continues to disappoint
One of the biggest debates around the ongoing economic recovery is whether it is just pent-up demand. This is an important question as far as medium-term GDP growth and per capita income levels are concerned. Most high frequency indicators suggest a robust sequential recovery in production. The Nomura India Business Resumption Index (NIBRI) reached 98.1 (against a pre-pandemic base of 100) in the week ending February 14. However, investment activity, which is a crucial determinant of future growth and a key indicator of business sentiment regarding future demand, continues to disappoint. Centre for Monitoring Indian Economy’s (CMIE) database on investment projects – it is among the most widely used investment activity trackers in India – shows that not only did new project announcements continue to fall, they have been falling at a greater pace. The CMIE database also shows that value of abandoned investment projects increased on a year on year basis in the quarter ending December 2020, a first since June 2019. New investments announcements have fallen by ?3.38 lakh crore and ?2.74 lakh crore for the private and government sector respectively in the quarter ending December 2020. This trend is in keeping with the contraction in index of eight core sector industries in December 2020, even though the Index of Industrial Production grew by 1%.