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India: Helpful steps to reverse cyclical slowdown; more to come
Economics/Growth/Monetary/Rates/India
DBS Group Research
30
Radhika Rao
Economist
Please direct distribution queries to
Violet Lee +65 68785281 violetleeyh@dbs.com
• The government has announced
several sector specific measures to
combat economic weakness and poor
investor sentiment
• As expected, the poorly received tax
surcharge on portfolio investors has
been removed
• Other steps include supporting auto,
MSMEs, corporates, non-banks, and
capital markets
• The fiscal impact of these measures is
likely to be modest
• Optimistic revenue projections
remain a worry
• Implications for forecast: June
quarter GDP will mark a slowdown
from March quarter’s 5.8% YoY
• Implications for investors: Relief
gains are likely in bond and equity
markets. Global factors will keep
USDINR supported
In a bid to revive growth, the Indian
government announced several sector specific
measures. This marks a coordinated policy
response, after the central bank lowered rates
by 110bps so far this year (see here and here),
August 26, 2019
in response to a slowdown in the past four
quarters and growth slipping to 5.8% YoY at the
start of this year. 2Q19 data due end of this
month is likely to mark further slowdown from
1Q and stay sub-6%.
Apart from the much-awaited removal of the
tax surcharge on portfolio investors, steps
included supporting auto, MSMEs, corporates,
non-banks, and capital markets. Highlights are
as below (full list is available here):
Auto sector
Government to purchase new vehicles and
replace older ones, one-time registration fees
stand deferred, vehicles under the previous
emission standard BS-IV purchased until March
2020 will be allowed to stay on the roads.
Taxation
Removal of the tax surcharge on portfolio
investors and domestic investors which was
imposed in the July’s Budget. Withdrawal of
enhanced surcharge on long-term and short-
term capital gains on equities.
MSMEs
Unify the definition of MSMEs amongst various
ministries, GST refunds to be expedited and
banks to streamline settlement of loans.
Infrastructure
Credit enhancement for infra and housing
projects, delayed payments will be fast-tracked,
and an organisation will be formed for credit
enhancement of infra projects.
Refer to important disclosures at the end of this report.
India: Helpful steps to reverse cyclical slowdown, more to come August 26, 2019

Banks additional challenge to fiscal consolidation

plans.
Capital infusion of INR700bn announced in the
Budget for banks will be expedited, and banks Nonetheless, optimistic revenue projections
plan to announce repo linked products, while are a worry for fiscal targets. As a percentage of
also fully passing the benefits of rate cuts. GDP, gross tax revenues are pegged to rise to a
decade high of 11.7% vs 11% in FY19, while net
Non-banks collections are seen at 7.8% vs 7% year before.
Achieving this in an environment of slowing
Liquidity support of INR200bn for housing
growth will be an uphill task, rendering the
finance companies. Banks to collaborate with
projected nominal GDP growth as a challenge.
banks to work on loans to MSMEs and micro
To make up for this shortfall, cess and
finance institutions, amongst others. This is in
surcharges have been increased (falls under the
addition to support extended at the August rate
revenue pool that is not shared with states),
review, which will provide priority sector status
record high divestment target and increased
to bank loans extended to non-banks for
reliance on dividends from PSUs and the central
financing agriculture, small businesses and
bank. GST implementation had pre-assumed
home buyers within specified limits. Separately
tax buoyancy and revenue neutrality, which are
end-use restrictions for external borrowings by
still to play out with the current system.
non-banks were also relaxed.

Capital markets
Medium-term policy framework
Plans to develop the credit default swap
RE Actual BE Projections
market, market dynamics will dictate rates,
% of GDP FY19 FY19 FY20 FY21 FY22
tranche and timing of offshore sovereign bond Fiscal
issuance. Move to attract offshore rupee deficit 3.4 3.4 3.3 3.0 3.0
investors/ markets to domestic exchanges Previous (3.4)
Revenue
Policy implications deficit 2.2 2.4 2.3 1.9 1.7
Primary
Policy intervention is directed at breaking the deficit 0.2 0.3 0.2 0.0 0.0
cycle of weak sentiments amplifying weak
activity. These measures are timely as the Gross tax
government looks to reverse the cyclical revenue 11.9 11.0 11.7 11.6 11.6
slowdown in certain sectors that are under Non-tax
revenue 1.3 1.3 1.5 1.4 1.4
stress. With most of these steps concerned with
streamlining existing measures, clearing credit Source: Budget documents, DBS
blockages and expediting already announced
measures, fresh fiscal costs will be limited. The The Finance Minister plans to announce two
Finance Ministry estimated that the tax more tranches of support measures over the
withdrawal will amount to tax foregone to the next fortnight. Taking a leaf of these recent
tune of INR14bn (0.01% of GDP), not posing an measures, we reckon that the focus will be on

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India: Helpful steps to reverse cyclical slowdown, more to come
finetuning measures along with an
accommodative monetary policy, while
steering clear of broad-based fiscal stimulus.
The latter, nonetheless, could come into play if
growth risks turn starker in second half of the
year and into 2020.
While these measures will help improve
sentiments and buoy economic activity, we
continue to see 30-40bps downside risks to our
full-year growth forecast. 2Q19 GDP due this
week will mark a slowdown from March
quarter’s 5.8% YoY, as consumption contracted,
weak private and public investments (due to
elections) and sub-par services sector. 3Q
growth is also likely to stay weak but stabilise as
government spending resumes after the
elections. An accommodative monetary policy
stance accompanied by a jumpstart in the
transmission process is also expected to lower
lending rates. Despite a better 3Q, evolving
trends lend downside risk to our forecast.
For monetary policy, limited fiscal implications
from the latest fiscal measures keep the door
open for further easing. The latest RBI minutes
August 26, 2019
from the August review saw the committee
members accord high priority to limit weakness
to growth and to jumpstart transmission. We
retain our call for another 15-25bp cut at the
October meeting, on the back of a weak 2Q GDP
outcome later this week. Challenging global
conditions and a dovish FOMC might also add to
the case for the RBI to take a growth supportive
stance, though admittedly it will be a close call.
Further easing will need to be balanced with
preserving policy space after frontloading rate
cuts this year.
Relief gains are likely in bond and equity
markets on positive domestics, but gains in the
latter will be restrained by an escalation in the
trade war rhetoric. Absence of an aggressive
stimulus program, while the central bank
remains focused on policy transmission, will
restrain a sharper rise in yields. Global yields
also look set to remain low for longer. USDINR,
meanwhile, continues to watch CNY
movements and broader dollar bias, which at
this juncture points towards further INR
weakness owing to a weak global environment.
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India: Helpful steps to reverse cyclical slowdown, more to come August 26, 2019

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