India outlook FY20

January 2019
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Dharmakirti Joshi Dipti Deshpande Adhish Verma

Chief Economist, CRISIL Ltd Senior Economist, CRISIL Ltd Economist, CRISIL Ltd
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India’s growth outlook for fiscal 2020 will essentially have domestic drivers. The key drivers are expected to be
private consumption and investment. With weak global environment, India will have to lean on domestic factors.
With the government pursuing a fiscal consolidation path, the pickup in growth is expected to be only gradual. A
change in the growth mix is on cards, with private sector likely to take over the baton from the government.

What luck and policy to shape economic outcome

Source: CRISIL

So unlike fiscal 2019, the push will have to come from private consumption and investments, as the government’s
hands are tied in the fiscal sense.

India outlook, a year from here

FY18 FY19F FY20F

GDP (y-o-y %) 6.7 7.2* 7.3

CPI inflation (%, average) 3.6 3.7 4.5

10 year G-sec yield (%, March) 7.6 7.7 7.5

Current account deficit (% of GDP) 1.9 2.6 2.4

Rs per $ (March) 65.0 71.0 72.0

Note: *advance estimates by CSO

Source: CSO, RBI, CRISIL

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In a tremulous world, how do India’s metrics look?
GDP growth could see a modest uptick to 7.3% in fiscal 2020

Fiscal 2019 was a year of recovery from demonetisation and the initial disruption caused by the Goods and
Service Tax implementation. The economy has so far fired mainly on the public investment cylinder, and is
estimated to grow at 7.2%. Private consumption has disappointed. Exports, however, have performed well,
presenting a buoy to the manufacturing sector.
In fiscal 2020, CRISIL expects GDP to grow 7.3% on following assumptions:

 Normal rains
 Oil prices lower than 2018

 A stable political outcome

With the government likely to stick to a fiscal consolidation path, the pick-up in growth is expected to be only
gradual. A change in the growth mix is on cards, with private sector likely to take over the baton from the
government.

GDP growth influencers

FY17 FY18 FY19 FY20

Consumption
1. Private / household consumption
1.a. Income growth / Income push
(i) Farm income
(ii) Non-farm income
(iii) Pay Commission revisions
1.b.Inflation for consumers / Input prices for manufacturers
(i) Food
(ii) Fuel and commodity
1.c. Interest rate environment
2. Government consumption

Investment
1. Private / corporate
(i) Capacity utilisation
(ii) Deleveraging
2. Government

Exports
1. Global growth
2. Trade environment
Source: CRISIL

Favourable Unfavourable Neutral

To reiterate, the drivers are expected to be private consumption and investment.

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Private consumption

Although it has slackened of late, private consumption growth next fiscal is likely to find support from softer interest
rates and improvement in farm realisations, as food inflation moves up. Plus, the lower base effect will help.
Private consumption growth has only been falling over the last 4 years.

Investments

Overall investments rebounded in fiscal 2019 with fixed investments growing 12.2%, up from 7.6% in fiscal 2018.
Moreover, the investment ratio (investment/GDP) is estimated to have surged to 32.9% after wallowing at 30-31%
in the past 4-5 years. The pick-up might have brought with it a healthy change in the investment spending mix,
though official data on this will only be available in early 2020. Spending (by the Centre and the states) on
construction of rural roads, highways, and affordable housing drove public investments, but private investment
looked up only in select sectors such as auto, cement and steel, where capacity utilisation increased.

For fiscal 2020, sustaining the momentum in overall investments will be a tough task without support from private
investments. With continuously improving capacity utilisation and the end of the de-leveraging phase for
corporates, conditions are ripe for a revival of private corporate investments. A stable political outcome will
facilitate this.

Exports

Some worries show up here. In fiscal 2019, exports performed well, growing 12.1%, led by a low base, easing of
constraints posed by GST implementation and lingering tailwind of global trade revival in 2017. The spur was also
reflected in the sharp pick-up in manufacturing GDP growth to 8.3% compared with 5.7% in fiscal 2018. But gains
on the external front were offset with imports rising faster than exports.
However, going forward, export growth faces risks of weakening global trade growth owing to escalating trade
wars. But it could also benefit from bilateral trade wars, especially between United States and China. In the recent
past, India’s exports to China have actually risen for those products on which China has imposed tariffs on US.
Variations to the base case forecast
These assumptions hold for a base case forecast of 7.3% GDP growth in fiscal 2020. At this juncture risks are
tilted somewhat to the downside than upside to this forecast.
The downside emanates from the following:
(1) Monsoon risk: Our base case assumption is of a fourth consecutive year of normal monsoon. The past 15
years have seen two such periods of four consecutive normal rainfall years – 2005 to 2008 and 2010 to 2013 –
that yielded healthy average agriculture growth of 3.6% and 5.5%, respectively. But the National Oceanic
Atmospheric Administration of United States (US) is forecasting an El Niño1 event in 2019. India faced two
consecutive El Niño events in 2014 and 2015 with agriculture GDP growth dropping to near zero. Now, when
farmer incomes have been dropping, a weak rainfall, if manifests, could add to the rural pain.
(2) Political risk: If the general elections this year were to yield a fractured mandate and derail/delay the process
of reforms, the implications on sentiments, investments and growth could be adverse.

1 The condition, which typically occurs at irregular intervals of three to five years, weakens the Asian monsoon, often causing drought in north-
west and central India and heavy rainfall (or even floods) in north-east.

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(3) Oil prices: In the base case, global crude oil prices are expected to soften to settle around $60-65 average
per barrel in fiscal 2020 compared with $68-72 average per barrel in fiscal 2019 as overall global demand slows.
However, some price pressure could be felt in response to the recently announced supply cuts by the Organisation
of Petroleum Exporting Countries (OPEC). If oil prices were to spike and stay high through the fiscal, India’s
manufacturers could face input price pressures. And with consumption seeing only a gradual revival, pass-through
of these higher costs on to prices could be difficult therefore squeezing margins.
(4) Much weaker global outlook: For now, the deceleration in global growth is gradual. However, if the
slowdown is much faster and deeper than is being currently expected, global demand and trade growth could
severely slowdown, creating adverse consequences for India’s exports.

Inflation to rise in fiscal 2020

In all likelihood, fiscal 2019 would be the second consecutive year of sub-4% consumer price index (CPI)-based
inflation. From an average 4.5% in fiscal 2017, CPI inflation fell to 3.6% in fiscal 2018. We estimate it at 3.7% for
fiscal 2019, given the continuous and sharp decline in food prices and slowdown in global crude oil prices
compared with a few months ago.

How the components have moved

CPI inflation (%, y-o-y)

10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Jul-16
Jul-15

Jul-17

Jul-18
Jan-15

Nov-15
Jan-16

Nov-16
Jan-17

Sep-17
Nov-17
Jan-18

Nov-18
Sep-15

Sep-16

Sep-18
Mar-15

Mar-16

Mar-17

Mar-18
May-15

May-16

May-17

May-18

Headline Food Core Fuel & Light

Source: CSO, CRISIL

Poised for an uptick in fiscal 2020

Consumer price inflation (%)

6
4.9
4.5 4.5
3.6 3.7

FY15 FY16 FY17 FY18 FY19 F FY20 F

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Source: CSO, CRISIL

However, some of these factors may change in fiscal 2020:

 Food inflation has remained subdued for long, with key categories such as vegetables, pulses, and
sugar witnessing fall in prices for many months now. This has been leading the decline in the headline
number so far. But the situation could likely reverse if monsoon fails or is inadequate next fiscal (given
early warnings of El Niño). Fiscal 2020 might also see an upturn in pulses prices as they seem to follow
a cobweb phenomenon2 with prices rising every third year. According to World Bank’s latest projections,
global food prices, which were almost stable in calendar 2018, are expected to rise by 1.5% in 2019. This
is likely to have bearing on domestic food prices, too.
Also, if the government’s procurement machinery becomes responsive enough to address the farm stress,
food prices could get pushed towards announced higher minimum support prices.
 Core inflation, which has about 54% weight in overall CPI, is another factor to watch out for, as it
continues to remain sticky. Even as housing inflation has been trending down – as the one-time statistical
impact of the Pay Commission-related house rent allowance hike is waning off - other categories such as
health, education, recreation and amusement, and transport and communication continue to witness high
(5% +) inflation. This limits the downside to overall inflation. Factors such as implementation of Pay
Commission hikes by more states and populist measures such as farm loan waivers can add to the upside
for core inflation or keep it elevated.
 Fuel (petrol & diesel) inflation is likely to remain soft. Global crude oil prices have come off their recent
peak in October 2018, and are unlikely to rebound this year, given the slowdown in global growth
prospects. Lower crude oil prices can translate to lower fuel inflation for India provided excise duties are
not hiked. However, it is important to note that the weight of petrol & diesel in overall CPI basket is quite
low (2.3%), and hence, its impact on overall inflation is limited.
The above considered, CRISIL projects CPI inflation in fiscal 2020 at a higher 4.5%

Current account deficit to ease

We expect current account deficit (CAD) to reduce to 2.4% of GDP in fiscal 2020 from 2.6% of GDP in fiscal 2019.
Import growth is expected to slow down, driven by lower oil prices relative to fiscal 2019. However, export growth
is also expected to slow on account of lower global GDP growth (especially in advanced economies and China,
which are India’s top export destinations), and weakening global trade growth on account of escalating trade wars.

2
Depending on the elasticity of the demand and the supply curve, the fluctuations in prices and production would perpetually continue, or
converge to or diverge from the equilibrium, thus creating a cobweb like pattern around the two curves. If the demand and supply curves have
similar elasticity, then the prices and production would continuously fluctuate. If the demand curve is relatively more elastic than the supply
curve, the fluctuations may eventually converge to an equilibrium. However, if the demand curve is relatively inelastic compared with the
supply curve, the fluctuations may diverge away from the equilibrium.

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CAD to moderate

(% of GDP)

2.6
2.4

1.9

1.3
1.1
0.6

FY15 FY16 FY17 FY18 FY19 F FY 20 F

Note: F=forecast

Source: Reserve Bank of India, CRISIL

Rupee to remain in a flux

We expect the rupee to remain volatile and settle at 72/$ on average by March 2020 compared with an estimate
of 71/$ by March 2019. Low crude oil prices and slowing pace of monetary policy normalisation in the US will
support the rupee, so we see only a modest weakening. Low crude oil prices keep external vulnerability (as
measured by CAD) under check and slower policy rate hikes by the US Federal Reserve reduce the interest rate
arbitrage. But given that India runs a CAD, rupee remains exposed to volatility emanating from oil, tariff wars, and
monetary policy surprises from the advanced countries.

Volatile rupee

Re/$
80
75
Taper
70 tantrum
65 Greek exit
and credit
60 1. Grexit / bailout fear
EU double freeze fear
2. Brexit
55 Lehman crisis recession
3. Fed rate hikes
fear
50 4. QE tapering
5. Oil price spike
45 6. Tariff wars
40 7. Turkey contagion
8. Rise in US yields
35
Jul-15

Jul-18
Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-16

Jul-17
Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Source: Reserve Bank of India, CRISIL

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Interest rates to soften
Domestic interest rates, which had risen last year, are expected to soften in fiscal 2020. With inflation under
control, softer crude oil prices relative to last year, we believe the Monetary Policy Committee would change its
stance to neutral from calibrated tightening and could cut the repo rate by at least 25 bps (from 6.50% currently).
This will help soften benchmark bond yields.
However, fiscal health remains a key risk. We assume central government’s fiscal deficit to be 3.3% of GDP in
fiscal 2020. Any slippage will put upward pressure on bond yields.
On the global front, slower pace of rate hikes in the US will support domestic yields. S&P Global expects the Fed
to raise rates only twice in 2019 by 25 bps each (compared with three hikes of 25 bps each projected earlier),
following four rate hikes in 2018. Lower crude oil prices, and its positive impact on India’s macros - current account
deficit, inflation and fiscal health -can further help investor sentiment.
Due to these factors, we expect the 10-year government security (G-sec) yield to average at 7.5% by March 2020
compared with 7.7% in March 2019.

Factors that will shape interest rate outlook

FY17 FY18 FY19 FY20

Repo rate

Inflation
Domestic factors
Fiscal deficit

CAD

Oil prices
Global factors
US interest rates

Source: CRISIL

Favourable Unfavourable Neutral

Global trends that matter

1. Growth is coming down from a high

The ‘synchronous’ music has more or less stopped, with recent growth projections signalling quite the reverse in
2019. Growth in most major economies is set to moderate. According to S&P Global, global growth is expected
to slow to 3.6% in 2019, compared with a six-year high of 3.8% in 2018.
The US is expected to lead the way down, as both waning fiscal stimulus and cumulative effect of ongoing
monetary policy normalisation will drag growth. China's expansion will continue to moderate amid anticipated
policy easing, as ongoing trade tensions impact business and investor confidence negatively. Europe will slow,
too.
Moreover, risks are tilted to the downside. They include uncertainty about trade wars and pace of interest rate
normalisation by the US Federal Reserve.

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What’s in it for India: Slowing global demand and trade will hurt India’s exports growth in 2019. India’s exports
already missed the bus in 2017, when growth was booming all around, owing to the twin domestic disruptions
wrought by demonetisation and the Goods and Service Tax (GST) implementation. In 2018, volatility in crude oil
prices, which peaked to a four-year high of $84 per barrel during the year, and US tariffs on steel and aluminium,
further weakened net exports growth.

Global growth in most major economies to moderate in 2019

Share in India’s export (%) Real GDP growth (%, y-o-y)

Region/ Country Fiscal 2017-18 2015 2016 2017 2018F 2019F
United States of America 15.8 2.9 1.6 2.2 2.9 2.3
Eurozone (Euro Area-19) 10.4 2.0 1.9 2.5 1.9 1.6
United Kingdom 3.2 2.3 1.8 1.7 1.3 1.3
Japan 1.6 1.4 1.0 1.7 0.9 1.1
China 4.4 6.9 6.7 6.9 6.5 6.2
World (S&P Global) - 3.5 3.2 3.7 3.8 3.6
World (IMF) - 3.4 3.3 3.8 3.7 3.5
Source: CRISIL, S&P Global, International Monetary Fund (IMF) (January 2019)

2. Monetary policies – asymmetric and normalising

Advanced economies are ‘normalising’, or winding back their extremely accommodative monetary policies
unfurled in the wake of the 2008 global financial crisis. Of the four major central banks, the US Federal Reserve,
European Central Bank, and the Bank of England have initiated policy normalisation, while the Bank of Japan is
continuing with quantitative and qualitative easing.
Typically, such monetary policy normalisation involves central banks’ tapering of asset purchases, raising policy
rates, and eventually shrinking the size of their balance sheet to the normal level by rolling off maturing assets.

Major advanced economies aren’t ‘going back’ in the same way

European Central Bank of England US Federal

Bank of Japan
Bank Reserve

Balance sheet
Quantitative easing Tapering Rate hike
reduction

Source: S&P Global, CRISIL

In 2018, rising US interest rates meant bond market sell off in emerging markets. This led to a sharp weakening
of currencies in countries that run a current account deficit. India was no exception.

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What’s in it for India: While the slower-than-expected US Federal funds rate hike may favour foreign capital
inflows into India, a pick-up in the policy rates in Europe may chip off some of the gains. But this is unlikely to
materialise before the end of 2019. Moreover, US monetary policy actions have a greater impact on emerging
market economies compared with the ECB.3 Overall, India will stand to gain from the slowing pace of US Fed rate
hikes, in terms of capital flows (see Box below).

3. The ‘twist’ depends on oil

Being the largest import item, oil has a significant impact on India’s CAD, and indirect impact on inflation and fiscal
deficit. The following table indicates how India’s CAD could change with different levels of crude oil prices.
As crude oil prices rose to four-year highs in 2018, CAD sniffed 3% of GDP, the highest since the ‘taper tantrum’
period. India’s vulnerability to crude oil price changes also made it one of the worst victims of capital flight among
emerging markets. This caused a sharp depreciation in the rupee.
However, since November, crude oil prices have fallen sharply, despite additional cuts announced by the OPEC,
reflecting weakening global demand conditions.
Going forward, slower global GDP and trade growth will weigh on demand and keep crude oil prices lower than
last year.

Crude impact on CAD

Crude oil price

CAD (% of GDP)
($/barrel)
50 1.8
60 2.3
62.5 2.4 CRISIL forecast for fiscal 2020
70 2.7
80 3.1
Note: The CAD forecast assumes that other factors remain the same, as in our baseline forecast for fiscal 2020

Source: CRISIL

3
Rey (2015), International Channels of Transmission of Monetary Policy and the Mundellian Trilemma. IMF

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 Key developments in the US

 Slowing US growth: S&P global expects US to slow to 2.3% in 2019 from 2.9% in 2019
 Slowing pace of monetary policy normalisation: In its December 2018 monetary policy meeting, the
Federal Open Market Committee signalled a slower pace of policy rate hikes in 2019 and 2020,
compared with September projections
 China-US trade war “truce”: US has delayed increasing tariffs on $200 billion worth of Chinese goods
to 25% from 10% pending a 90-day negotiation period until March 1, 2019

…and how they translate for India

 Slower growth in the US will adversely impact India through the export channel, since it accounts for
the largest share of India’s export earnings. About 16% of India’s exports go to the US, compared with
10% to Euro-area, 9% to United Arab Emirates, and 4% to China
 Export growth can also be affected by escalating trade war between US and China. While the
negotiations between the two economies are still on, investors are postponing their long-term
investment decisions, given persisting uncertainty. This will weigh on global GDP growth. In addition,
protectionist measures will weaken trade intensity, further reducing India’s scope for growing its exports
 Interestingly trade war seems to have boosted India’s exports to China. In fiscal 2019 so far (April-
November), India’s exports to China has grown 41% on-year, compared with 11.8% growth to US and
8% to the Euro-area. Exports have, especially, increased in cotton and petroleum, on which China has
been intending to impose tariffs on US. If this trend continues, it can help India reduce its massive trade
deficit with China
 On the upside, a dovish monetary policy in the US would ease the pressure on rupee and interest rate,
as foreign capital that exited emerging market economies on the back of steady US rate hikes in US
and rising US treasury yields returns.

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