Emerging

In need of investment

th  
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EcoEmerging//4 quarter 2019  
economic-research.bnpparibas.com  
India  
In need of investment  
Economic activity slowed sharply in the first quarter of fiscal year 2019/2020 and second-half prospects are looking morose, even  
though the monetary authorities and the government have taken major stimulus measures. Monetary easing resulted in a mild  
decline in lending rates. The recently announced cut in the corporate tax rate should boost domestic and foreign investment in the  
medium term, although it will not impact growth much in the short term. Companies might decide to consolidate their position  
rather than to invest in the midst of a sluggish environment.  
Economic growth slumps to record lows  
1-Forecasts  
India’s GDP growth has slowed sharply since the second half of  
2017 2018e 2019e 2020e  
(
1)  
2
2
018. In the first quarter of fiscal year 2019/2020 (from April to June  
019), GDP rose only 5% year-on-year (y/y), the slowest pace in the  
Real GDP growth (%)  
7.2  
6.8  
5.4  
6.5  
(
1)  
Inflation (CPI, year average, %)  
3.6  
3.4  
3.5  
3.8  
past six years. The slowdown is mainly due to the sharp  
deceleration of domestic demand. Although Indian exports slowed  
(1)  
Central Gov. Balance / GDP (%)  
-3.5  
-3.4  
-3.6  
-3.4  
(1)  
Central Gov. Debt / GDP (%)  
45.6  
-1.8  
44.6  
-2.1  
44.4  
-2.1  
44.1  
-2.2  
(
while exports from the other Asian countries contracted), the net  
(
1)  
Current account balance / GDP (%)  
contribution of exports swung into positive territory after making a  
negative contribution for the previous eight quarters.  
(
1)  
External debt / GDP (%)  
20.0  
409  
20.0  
393  
19.9  
435  
20.0  
460  
Forex reserves (USD bn)  
Private consumption, the main growth engine, rose by only 3.1% y/y  
compared to a 2018 average of more than 8%. The slowdown can  
be attributed to a decline in household confidence combined with an  
increase in the unemployment rate, which rose to 8.2% in late  
August (vs. 6.5% in the year-earlier period). Moreover, the supply of  
non-bank lending slowed due to the financing difficulties  
encountered by non-banking financing companies (since the  
bankruptcy of IL&FS in September 2018). Total investment slowed  
sharply to 4% y/y (vs. 13.3% last year) at a time of high interest  
rates (9.8% for new rupee-denominated loans in July) even though  
the Reserve Bank of India (RBI) has been easing monetary policy  
since February 2019. Average interest rates on new loan production  
declined by only 29 basis points (bp) between February and August,  
despite the central bank’s 110bp key rate cut over the same period.  
Forex reserves, in months of imports  
Exchange rate USDINR (year end)  
11.5  
63.9  
9.1  
9.4  
9.3  
71.0  
71.2  
73.5  
(
1): Fiscal year from April 1st of year n to March 31st of year n+1  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Industrial output  
y/y %, 3-month moving average  
Total industrial output  
▪▪ Production of capital goods  
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0
5
0
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Economic indicators for the second quarter of the current fiscal year  
do not suggest a rebound in the short term. Output of capital goods  
contracted in August for the seventh consecutive month, automobile  
sales declined sharply, confidence surveys continued to deteriorate  
and industrial activity, according to the latest PMI surveys, still did  
not rebound in August. Lastly, bank lending has been slowing since  
February and slumped even further in August.  
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-10  
2014  
2015  
2016  
2017  
2018  
2019  
The government and the central bank have undertaken numerous  
measures to boost economic activity, the biggest of which was the  
sharp cut in the corporate tax rate.  
Source: CEIC  
Corporate tax cut: a positive medium-term impact  
other emerging markets of Asia (25% in Indonesia, 24% in  
Malaysia).  
In late September, the government announced that it was cutting  
the corporate tax rate from 30% to 22% (effective retroactively to 1  
April 2019), with a preferential rate of only 15% for manufacturing  
companies created after 1 October 2019. Including all of the other  
taxes companies must pay (notably education taxes), this would  
bring the effective tax rate to 25.17% (17% for new manufacturing  
companies), which is close to the corporate tax rates applied in the  
In the short term, the impact of the corporate tax cut is bound to be  
limited. The current slowdown is essentially due to household  
consumption. Moreover, Indian companies might decide to use the  
tax cut to slash debt rather than to invest in the midst of a sluggish  
economic environment.  
th  
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EcoEmerging//4 quarter 2019  
economic-research.bnpparibas.com  
In the medium term, this measure should increase India’s  
competitiveness, thereby favouring foreign direct investment (FDI).  
Yet the Modi government must take its reform efforts further.  
Restrictions on land acquisition and labour market rigidity continue  
to place a major damper on domestic and foreign investment.  
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Balance of payments  
4-quarter sum, of GDP  
Current account balance  
Net portfolio investment Net other investment  
6
Net derivatives Net direct investment  
Public finances: risk of fiscal slippage in 2019/2020  
For the second consecutive year, the federal government may not  
meet its target of reducing the fiscal deficit to 3.3% of GDP in fiscal  
year 2019/2020 (compared to 3.4% of GDP in 2018/2019). In the  
first 5 months of the fiscal year, the fiscal deficit was already  
equivalent to 78.7% of its full-year target.  
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0
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This poor performance can be blamed on revenues, which fell far  
short of estimates. In the first 5 months of the current fiscal year,  
spending amounted to 42.2% of the full-year target, but revenues –  
though on the rise  accounted for just 29.8% of the full-year target  
of 9.9% of GDP (vs. 8.8% of GDP in 2018/19). Taxes revenue was  
the main component that fell short of the government’s forecast. It  
amounted to only 24.5% of the full-year target due to the downturn  
in domestic demand and foreign trade.  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Source: RBI  
high of USD 401.6 billion at the end of September. Reserves cover  
.4 times the country’s short-term financing needs (USD 297 billion).  
At the same time, FDI and portfolio investment have increased (to  
.9% of GDP and 1.4% of GDP, respectively, in H1 2019). The big  
increase in FDI following the re-election of N. Modi is particularly  
good news, because 1) it covers the current account deficit, and 2) it  
reduces the country’s dependence on volatile capital inflows.  
Although the current account deficit is likely to widen in the second  
half of 2019 (after reaching 1.3% of GDP in H1 2019, compared to  
According to government estimates, the cut in the corporate tax rate  
will generate a revenue shortfall of 0.7% of GDP (including 0.46% of  
GDP for the central government). Part of this shortfall will be offset  
by a bigger-than-expected transfer of the central bank’s surplus: in  
late August RBI announced that the transfer of “capital surplus” (in  
relation to its needs) to the government would be equivalent to 0.8%  
of GDP (vs. 0.5% of GDP in the finance ministry’s initial fiscal  
forecast). If the government does not significantly reduce spending  
during the rest of the year, the deficit for the general government  
could increase by 0.4 pp to 6.7% of GDP. Consequently, the  
government seems to be very far from meeting its target of reducing  
the public debt ratio to 60% of GDP by 2025 (from 67.3% of GDP in  
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% in the year-earlier period) it should continue to hold at about  
.5% of GDP.  
Lastly, external debt is still mild, although it has increased slightly  
+8.7 in Q2 2019 y/y). At the end of June 2019, it amounted to only  
19.8% of GDP. Commercial borrowing is the largest debt category  
38.4% of the total), followed by non-resident deposits (24%) and  
2
018/2019).  
(
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For an emerging country, India’s public debt is still high although its  
structure is not very risky. Exchange rate risk is low because debt  
denominated in foreign currency accounted for only 2.8% of GDP in  
June 2019. Refinancing risk is also limited since the average  
maturity on the debt is 10.4 years. Only 4.3% of its debt will reach  
maturity over the next twelve months. With residents holding 93% of  
its debt, the government is not very dependent on foreign investors  
for debt financing.  
(
short-term trade credit (18.7%).  
Less pressure on external accounts  
India’s external accounts deteriorated in 2018. A wider current  
account deficit combined with a decline in foreign direct investment  
and portfolio investment resulted in a USD 15 billion decline in  
foreign exchange reserves and a 9% depreciation of the rupee  
against the dollar.  
This movement has since been reversed. In the first 9 months of  
2019, the average exchange rate has been stable and foreign  
exchange reserves have increased by USD 33.5 billion to a record  
1
In comparison, Indonesia’s government debt accounted for only 30.1% of GDP  
in 2018.  
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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