Emerging

Many risks threatening the recovery

nd  
Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
5
INDIA  
MANY RISKS THREATENING THE RECOVERY  
The economic recovery could be weakened by a second wave of Covid-19 and a fresh surge in inflation. With the  
government seeking to step up the pace of reforms to support growth over the medium term and improve the business  
environment, the number of protests against the moves is mounting, with protestors’ ire directed particularly at the  
privatisations that the government is counting on to cut its budget deficit. In the banking sector, banks currently are  
able to deal with the expected rise in credit risk. Nevertheless, in order to support a resumption of lending growth,  
a new injection of capital into state-owned banks has already been planned, alongside the creation of a defeasance  
structure.  
ECONOMIC RECOVERY WEAKENED BY RISING INFLATION  
AND A SECOND WAVE OF COVID-19  
FORECASTS  
2
019  
2020e  
2021e  
2022e  
According to government estimates, real GDP for the 2020-21 fiscal  
year, that ended on 31 March 2021, contracted by 7.7% (having grown  
by 4.2% in the 2019-20 fiscal year). In the 2021-22 fiscal year, the  
central bank forecasts a recovery of 10.5%. But this recovery could  
be jeopardised either by a second wave of Covid-19 or by strong  
inflationary pressures.  
Real GDP growth(1) (%)  
4.2  
-7.2  
6.2  
12.5  
4.9  
4.1  
4.6  
Inflation (1) (CPI, year average, %)  
General Gov. Balance(1) / GDP (%)  
General Gov. Debt(1)/ GDP (%)  
Current account balance(1) / GDP (%)  
External debt(1)/ GDP (%)  
4.8  
-7.3  
72.2  
-0.9  
19.9  
457  
7.7  
-14.8  
89.8  
0.3  
-11.0  
90.0  
-0.9  
21.0  
590  
9.1  
-9.5  
91.5  
-1.7  
20.5  
620  
9.2  
21.5  
542  
11.0  
Since March, the number of Covid-19 cases has increased significantly,  
particularly in the State of Maharashtra, which accounts for a  
substantial 14.5% of the total economy. On 4 April, the government  
therefore decided to impose a curfew in the State and to close ‘non-  
essential’ stores. Other States have already imposed new restrictions  
and further health measures may be introduced given that a very small  
share of the population has been vaccinated (2.9% had received a first  
vaccine dose by the end of March).  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
(1): Fiscal year from April 1st of year n to March 31st of year n+1  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
Meanwhile, there has been a resurgence in inflation (to 5% year-on-  
year in February, from 4.1% in January), due in particular to rising food  
prices and higher transport costs as the result of rising oil prices. This  
could also weaken the recovery, given that these two categories account  
for 39% and 8.6% respectively of the typical Indian household budget.  
Against a background of rising US long rates, the Indian central bank  
may therefore elect to tighten its monetary policy to tackle inflation  
and support the currency, even though inflation was still below its  
target of 4% +/- 2 points at the end of February.  
PRICES STARTED TO RISE AGAIN IN FEBRUARY  
y/y, %  
4
1
Consumer price index  
Food  
Prices excluding food and energy  
Miscellaneous goods  
1
2
10  
8
Transport  
6
A BUDGET THAT DEPENDS ON PRIVATISATION RECEIPTS  
4
2
The public finances are structurally fragile due to a narrow fiscal base  
and a continued high level of rigid expenditures, despite the reduction  
in government subsidies since 2014.  
0
-
2
They have been further weakened by the economic crisis that  
followed the Covid-19 epidemic. According to the Finance Ministry, the  
government deficit could reach 9.5% of GDP for the 2020-21 fiscal year,  
with the general government deficit hitting 15% of GDP. Over the first  
ten months of 2020-21, the increase in the deficit came mainly from  
a rise in spending, particularly in the form of subsidies to the poorest  
2017  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: RBI  
The government plans to reduce its deficit by 18.5%, thanks to an  
increase in tax revenues as a result of an economic recovery and a sharp  
increase in revenue from the privatisation of state-owned companies  
1
households, which doubled their share of total spending to nearly 19% .  
For the fiscal year that runs from 1 April 2021 to 31 March 2022, the  
Finance Ministry predicts that the government deficit will be reduced  
to 6.8% of GDP and the general government fiscal deficit to 11.0% of  
GDP.  
(
including two banks, an insurance company, electricity distribution  
companies, railways and the Air India airline). But the target for cash  
raised from privatisations (0.8% of GDP from an average of 0.4% over  
the past three years) looks particularly ambitious, given continued high  
levels of volatility in equity markets and the repeated waves of protest  
against the privatisations.  
1
Part of the food subsidy spending in 2020-21 was accounted for by settlement of delayed payments by the government to the Food Corporation of India.  
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for a changing  
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nd  
Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
6
Total public spending is likely to remain stable (resulting in a two-point  
reduction in spending as a percentage of GDP). Indeed it could even  
increase as the government is planning to boost spending on health  
and infrastructure investment.  
It would therefore seem that the government is prioritising support  
to the economic recovery over consolidation of the public finances,  
which remains somewhat theoretical. According to the ratings agency  
Fitch, government debt could thus climb above 90% of GDP in 2020-  
BANK LENDING REMAINS SLUGGISH  
Commercial banks credit outstanding (RHS, y/y, %)  
Bank credit to industry (LHS, y/y, %)  
1
1
1
1
6
4
2
0
8
6
4
2
0
8
6
4
2
0
2
1 and stay at that level over the next five years. For the time being,  
there is little threat when it comes to refinancing debt. That said, the  
sharp rise in debt servicing costs (32% higher in 2020-21) is a source  
of concern, especially as government receipts remain extremely low.  
Interest payments are likely to hit more than 42.5% of government  
revenue in 2021-22, seven points higher than in 2019-20. Elsewhere,  
inflationary pressure could result in an increase in yields on long-term  
government bonds, which at the beginning of April remain contained  
at 6.2% (for 10-year bonds), in other words still below their level from  
before the Covid-19 crisis.  
-
2
-4  
-6  
2
017  
2018  
2019  
2020  
2021  
CHART 2  
SOURCE: RBI  
BANKING SECTOR: THE GOVERNMENT ANNOUNCES THE  
CREATION OF A DEFEASANCE STRUCTURE  
In its latest Financial Stability Report, published in January 2021, the  
central bank noted that the banking sector was in a more solid, albeit  
still fragile, position in Q3 2020 than it has been for the last five years.  
The share of non-performing loans was lower, at 7.5%, provision cover  
higher, at 72.4% of non-performing loans, and solvency ratios more  
comfortable, at 15.8%. Meanwhile, up until December 2020, banks  
continued to increase provisions in the expectation of an increase in  
non-performing loans, whilst not actually recording the loans as such.  
The deterioration in the quality of their assets will be recognised from  
the second quarter of 2021, as the Supreme Court confirmed (in March  
1
30bp off average lending rates (policy rates were cut by 115bp  
between January 2020 and March 2021), the rate of growth remains  
modest.  
Excluding loans for the purchase of food, lending to households has  
decelerated, and lending to large companies has contracted due to  
a fall in their investment. These larger companies have not required  
financial support to get them through the crisis; although revenue fell  
sharply, profits increased due to the falls in labour costs and commodity  
prices over much of 2020.  
Lending to medium-sized companies (18% of total lending) has stood  
out with extremely strong growth since September (up 19.1% year-on-  
year in January 2021), under the government-guaranteed Emergency  
Credit Line Guarantee Scheme, which was introduced on 23 May  
2
021) that the moratorium on repayments that was in force between  
March and August 2020 could not be extended beyond August 2020  
and that regularisation of the situation should take place in March.  
Nevertheless, according to the ratings agencies and the central bank,  
banks should be in a position to cope with an increase in lending  
risk, even though the central bank estimates that the share of non-  
performing loans is likely to hit 13.5% in Q3 2021. The main source  
of concern lies more in their possible need to recapitalise to meet  
their solvency ratios, whilst also being able to expand credit supply  
at a time when they are having to increase provisions. Against this  
background, the government included in its budget for the year an  
injection of INR200 billion in additional capital (0.2% of GDP) for the  
state-owned banks, following on from a recapitalisation of a similar  
amount in the previous fiscal year. However, even these sums are far  
below the INR 1.9 trillion to INR2.2 trillion that ratings agency Moody’s  
estimates is needed.  
2
020 and closed on 31 March 2021. This scheme was specifically  
designed to address the financing needs of small and medium-sized  
businesses. According to the government, by the end of January 2021,  
INR 1.9 trillion in bank loans (excluding non-bank financial companies)  
have been made under this programme (36.6% of loans made over the  
year).  
Completed on 9 April 2021  
To help clean up bank balance sheets and support the recovery in bank  
lending, the government has announced the creation of a defeasance  
structure. For the time being, no details have been provided. The  
transfer of non-performing loans would free up capital, currently being  
used to bolster provisions for lending.  
In addition, since May 2020 the government and the Reserve Bank of  
India have adopted policies to support households and companies,  
particularly small and medium-sized enterprises. Even so, despite the  
relaxation of monetary policy by the central bank, which has trimmed  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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