D&B ECONOMY

View
Issue 125

top
October 2018 from
the
Contents
The Global Financial Stability Report by the IMF, highlights that near-
term risks to global financial stability have increased somewhat over the
View from the top past six months. Emerging markets face substantial downside risks from
Page 1 tightening of global financial conditions, intensification of market pressures,
reversals in capital flows and rising oil prices. It is in this context, India’s
rising vulnerabilities with respect to external sector assumes importance.
India’s globalisation rate on an average has increased considerably
from the pre-crisis period of 43% during FY00 – FY09 to 55% during
Macro Scan FY10-FY18. With increase in India’s globalisation, risk of contagion has
Real Sector increased and in tandem stress on external sector has increased.
Price Scenario The strain on India’s external balance sheet is evident from the latest
Balance of Payments data which has turned negative in Q1 FY19 for
Money & Finance the first time in six quarters. Capital flows have been negative for the
External Sector 2nd consecutive quarter in Q2 FY19. Foreign investors continue to pull
Page 2 out strongly from the Indian markets in Oct 2018 and thus FIIs are not
adequate enough to finance the rising imbalance in the current account.
As a result forex reserves have declined by more than $25 billion over
end-March 2018. Moreover, debt pressures are mounting as External
Commercial Borrowings (ECBs) have increased and debt rollovers will
Economy Outlook face higher financing costs. Rupee depreciation and persistent rise in
Page 3 global crude oil prices are likely to keep the merchandise trade deficit
high. This has increased the stress on India’s external sector. These
issues are not going to be resolved soon till concerns on geopolitical
issues and trade wars remain heightened.
Special Article Domestically, the risk to growth stems from lower capacity utilisation,
Page 4 weak investment rate, credit constraints and the triple balance sheet
problem. Capacity utilisation rate of the manufacturing sector at 73%
(FY18) remains well below the rate of around 80% achieved during the
period FY10 – FY12. As a result investment rate has moderated from the
high levels witnessed in FY12. After continuing to decline for 13 straight
months, bank credit to industries grew at an average of around 1% since
Nov 2017. Corporates sourcing funds from global markets are facing
higher lending rates and global liquidity remains tightened. The balance
sheet of the banks, corporate and government remain strained. Gross
non-performing assets (NPAs) of SCBs have grown 8 fold in six years till
FY18 and continue to increase. Sectors laden with high stressed assets
are engineering, infrastructure, construction whose debt serviceability
and profitability has been impacted. The Central Government fiscal deficit
deviated from the target by 0.3% in FY18 and on a state level 24 out
of 39 states have failed to meet the target of 2.7% in FY18. Revenue
collections from GST has not been able to meet the target and the cut in
GST rates for a wide variety of goods and services has added to revenue
pressures.
Research Team
Despite the global head winds, India’s long term growth story, remains
Dr. Arun Singh robust. Being the 2nd largest populated country in the world, India’s
Dipshikha Biswas consumption demand drives the growth momentum. To continue the
growth trajectory, it’s time that investment accelerates as it will directly
Raj Kiran provide jobs for the millions of population entering the workforce and
Sharika Dhar indirectly accelerate the consumption demand which will keep the growth
momentum rolling.

1
 Macro
Scan
Manufacturing and Mining sector drags down IIP Real Sector
% % • IIP grew by 4.3% in Aug 18, a 3-month low, compared to a growth of 4.8%
11 10 in Aug 17, mainly due to a slowdown in mining activity which recorded a
9
23-month low of -0.43%.
8

7
• Primary goods grew by 2.6%, lowest since Nov 17. Consumer durables
6 logged a growth of 5.2%, a 4-month low. Consumer non-durables noticed a
5
4
growth of 6.3% in Aug 18, increasing for 3 straight months.
3
• 7 of 23 industry sub groups contracted. Growth in other manufacturing
1
2
contracted by 6.9% in Aug 18. Wearing Apparel marked a growth of 18.9%
-1 0 (23-month high).
Aug-17

Sep-17

Nov-17

Dec-17

Jan-18

Jun-18

Jul-18

Aug-18
Oct-17

Feb-18

Mar-18

Apr-18

May-18

• Core sector output grew by 4.2% in Aug 18, a 3-month low mainly due to a
sharp fall in the growth of petroleum & refinery products from 12.3% in Jul 18
Manfacturing (RHS) Electricity (RHS) Mining (LHS) IIP (LHS)
to 5.1% in Aug 18 and due to a contraction in growth of fertilisers by 5.3%,
Source : MOSPI lowest since Oct 17.
• Crude oil output (-3.7%), continued to contract for the 9th consecutive month.

Cereal Inflation is pushing up inflation in Food Articles Price Scenario

8 40 • WPI inflation increased to 5.1% in Sep18, led by inflation of primary articles
6 30
of 3.0% which had contracted by 0.15% in Aug 18.

4 20
• Food articles witnessed a contraction of 0.2% in Sep 18 as compared to a
contraction of 4.0% in Aug 18.
2 10
• Pace of contraction for fruits and vegetables has reduced from 18.7% in
0 0
Aug18 to 5.4% in Sep 18.
-2 -10
• Inflation in Fuel & Power segment moderated to 16.6% in Sep 18, for the 2nd
-4 -20 consecutive month, from 18.1% in Jul 18.
-6 -30 • CPI inflation for Sep 18 stood at 3.8%, mainly driven by food inflation.
Sep-17

Nov-17

Dec-17

Jan-18

Jun-18

Jul-18

Aug-18

Sep-18
Oct-17

Feb-18

Mar-18

Apr-18

May-18

• Inflation in housing segment moderated to 7.1%, from 7.6% in Aug 18.

• Core CPI inflation continued to moderate for the 3rd month to 5.8% in Sep18;
Food Articles (LHS) Egss, meat & fish (LHS) Core WPI moderated to 4.9% after remaining constant for the
Food Grains (Cereals and Pulses) (RHS) Fruits & Vegetables (RHS) last 2 months
Source : Ministry of Commerce & Industry

Double digit growth in bank credit to services sector since Nov 2017 Money & Finance
% • The RBI in its 4th Bi-monthly Monetary Policy Statement for FY19 decided
30 to keep the policy repo rate unchanged at 6.25%. Consequently, the reverse
repo rate under the Liquidity Adjustment Facility (LAF) remains at 6.50%.
25
• The RBI eased cash rules for banks amid credit crunch fears - increased
20 Facility to Avail Liquidity for Liquidity Coverage Ratio from 11% to 13%,
taking the carve out from SLR available to banks to 15% of their NDTL.
15
• Aggregate deposits grew by 8.1% (y-o-y) in Sep 18 as against a growth
10 of 8.2% (y-o-y) in Sep 17. Bank credit grew by 12.5% (y-o-y) as against a
growth of 6.5% (y-o-y) during the same period.
5
• Bank credit to industries grew by 1.9% in Aug 18, an 8-month high. Bank
0 credit to infrastructure sector grew by 4.3% in Aug 18, highest since Apr 16.
Jun-17

Jul-17

Aug-17

Sep-17

Nov-17

Dec-17

Jan-18

Jun-18

Jul-18

Aug-18
Apr-17

May-17

Oct-17

Feb-18

Mar-18

Apr-18

May-18

• Net investments in mutual funds stood at Rs 705 bn in Q2 FY19 as

-5
compared to Rs 1,559 bn in Q2 FY18.
Agriculture & Allied Activities Industry Services Personal Loans
Source: RBI • The average 10-year G-Sec yields rose to 8.02% in Sep 18, an increase of
130 basis points on a year-on-year basis.

Steady inflows into NR(E)RA since April 2018 External Sector

US$ mn • Merchandise exports shrunk by 2.2% (y-o-y; due to base effect) to US$ 28.0
1,300 bn in Sep 18 while merchandise imports grew by 10.5% (y-o-y) to US$ 41.9
bn. Trade deficit stood at US$ 14.0 bn, lowest in 5 months.
900
• Oil imports grew by 33.6% (y-o-y) to US $ 10.9 bn in Sep 18, lowest in 5
500 months. Global brent crude oil prices increased by 43.0% (y-o-y) to US$ 78.9
per barrel in Sep 18.
100
• The rupee breached the 74 mark against the US dollar on October 5, 2018.
The average exchange rate in Oct 17 stood at around 65.
-300
• The six-country trade weight-based real effective exchange rate index stood
-700 at 95.38 in Sep 18 as compared to 103.22 in Sep 17.
Aug-17

Sep-17

Nov-17

Dec-17

Jan-18

Jun-18

Jul-18

Aug-18
Oct-17

Feb-18

Mar-18

Apr-18

May-18

• Foreign Institutional Investments witnessed net outflow, for the second

FCNR(B) NR(E)RA NRO consecutive quarter, of US$ 1.8 bn in Q2 FY19.
Source: RBI
FCNR(B) - Foreign Currency Non-Resident (Banks), NR(E)RA - Non-Resident (External) • External Commercial Borrowings increased to US$ 4.8 bn in Aug 18, a
Rupee Accounts, NRO - Non-Resident Ordinary Rupee Account
5-month high, as compared to US$ 1.6 bn in Aug 17.

2
 Economy
Outlook

Dun & Bradstreet's Macro Economic Forecasts

Forecast Latest Period D&B's Comments

There has been no broad based surge in inflation

4.9% - 5.1% 5.13%
Inflation W.P.I despite upside inflationary pressures in the economy.
Oct-18 Sep-18
Two factors, i.e. the base effect and second
round impact of increase in oil prices over other
commodities remain absent. It remains to be seen
over the next few months, how the spatial distribution
Inflation C.P.I 3.5% - 3.7% 3.77%
of rainfall, rupee depreciation and increase in oil
(Combined) Oct-18 Sep-18
prices impact inflation once the base effect wanes out

Rupee to continue to witness depreciation pressures

as tightening of global liquidity will lead to portfolio
Exchange Rate INR 73.6 - 73.8 72.22 outflows from emerging countries including India.
v/s US$ Oct-18 Sep-18 Higher current account deficit, increase in the Federal
fund rate along with geopolitical risks would keep
rupee under pressure

We expect IIP growth in Sep 2018 to remain at Aug

4.4% - 4.6% 4.34%
I.I.P Growth 18 level as festive related demand keep industrial
Sep-18 Aug-18
activity elevated. However, wider concerns on
Real GVA increase in interest rates and liquidity crunch in the
Q2 FY19 (F) Q1 FY19 (P)
Growth banking & non-banking segment would continue to
8.1% 8.0%
weigh on industrial production

15-91 days 7.1% - 6.9% 6.90%

T-Bills Oct-18 Sep-18

Depreciating rupee, rising oil prices, foreign debt

portfolio outflows amidst tightening of global liquidity,
10 year 8.0% 8.1% 8.02%
trade wars and concern of liquidity crunch in the
G-Sec Yield Oct-18 Sep-18
NBFC segment is expected to keep yields elevated in
the bond market

12.7% - 13.00% 12.51%

Bank Credit*
Oct-18 Sep-18

All figures are monthly average

* Refers to End Period

3
 Special
Article
Is the debt burden shifting to Emerging Markets post global crisis?
Since the global financial crisis struck the world economy, countries
have strengthened their supervisory and regulatory framework.
The Basel III accords and widespread adoption of stress test in
the banking sector have made the sector more resilient. During
this period, many countries took an unconventional path to protect
themselves from the global financial crisis. While these measures
were appropriate for some economies, it led to a much bigger problem
for others. For example, the debt to GDP ratio increased overall
and significantly in emerging economies. IMF’s Global Financial
Stability Report released highlighted the mounting debt concerns.
Post the crises, developing countries borrowed in dollars due to low
interest rate in several advanced economies. With a change in geo-
political scenario, interest rate hike in US and appreciation of US
dollar over a period of time, it became expensive for the developing
nations to repay their debts. The average deficit worsened to around
5% of GDP in 2016 from around 1% of GDP in 2007. Condition
for countries like Lebanon, Tunisia and Ukraine deteriorated due
to high public and external debt. On top of this, banking sector
in many economies has been stressed due to non-performing
loans which may impact bank capitalization going forward.

As per the report, from 210% in 2008, total non-financial debt in Going forward, these growing debt has a risk to derail the growth
countries with systemically important financial sectors now stands story of many emerging countries. The risk would emanate from
at $167 trillion, or over 250% of aggregate GDP. Total non-financial threat of portfolio reversals and limited policy headroom for the

Debt to GDP Ratio has been increasing at an alarming rate in Emerging Markets

0 to 25
26 to 60
61 to 95

96 a nd above

Y-o-Y change in Debt to GDP Ratio 2007 2008 2009 2010 2011 2012 2013 2014 2015
G-20 Advanced -0.7% 6.0% 16.5% 2.7% 0.5% 4.1% 1.5% 2.2% 4.0%
G-20 Emerging -5.1% 0.5% 8.9% 0.5% -0.8% -0.9% 4.7% 5.4% 11.1%
India -4.0% 0.7% -2.7% -7.0% 3.2% -0.8% -1.6% 0.5% 1.1%
Source: IMF-Global Financial Stability Report October,2018 LOW HIGH

debt includes borrowings by governments, nonfinancial companies,
and households. The overall non-financial debt expanded by 5%
in the world and 18% for emerging markets in 2017. This debt
problem accompanied with country specific risks, escalating geo-
political tensions, trade wars and normalization of monetary policy
by advanced economies is adding to the concerns posed by the
deterioration in the economic activity globally. IMF has revised its
global forecast downwards to 3.7% from 3.9% for 2018 and 2019 in
October 2018 due to weakening trade, manufacturing and investment.
government in the event of any further crises. IMF’s capital-flows-at-
risk analysis suggests that emerging market economies (excluding
China) could face debt portfolio outflows in the medium term of
$100 billion or more over a period of four quarters (or 0.6 % of their
combined GDP), broadly similar in magnitude to the global financial
crisis. Tightening conditions in advance economies does not auger
well for emerging market economies. A crucial policy priority for
emerging market economies should be to build and maintain
adequate foreign exchange reserves and use them judiciously.

While debt is a big concern globally, the scenario for emerging
and advanced markets varies, exposing them to different
vulnerabilities. United States faces high risk due to public sector
debt; in the Eurozone, corporate and sovereign sector debt are
considerably high. In other advanced economies, household
debt stands out as a major concern. In China, nonfinancial
corporate sector leverage has been rising and is currently well
above global historical benchmarks. Gross public debt has risen
considerably in Brazil in recent years and remains elevated in India.
As far as India is concerned, things are slightly better. India’s
foreign exchange reserves are within the adequacy range as
measured by IMF’s Assessing Reserve Adequacy (ARA) metric
and the risk of external demand shock relatively low as compared
to other emerging markets. However, to address increased
downside risks, there is a greater urgency for policymakers
to build buffers, resilience, and tackle long-standing issues.

Please send your feedback to Dr Arun Singh, Lead Economist.

Dun & Bradstreet Information Services India Pvt. Ltd., ICC Chambers, Saki Vihar Road, Powai, Mumbai 400 072. CIN - U74140MH1997PTC107813
Tel: 91-22-28574190 / 92 / 94 | Fax: 91-22-28572060 | Email: SinghArun@DNB.com | www.dnb.co.in

© Copyright Dun & Bradstreet India (D&B);While D&B India endeavours to ensure accuracy of information, we do not accept any responsibility for any loss or damage to any
person resulting from reliance on it.