Chart of the Week: India’s economic collapse
Head of Macro Analysis
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
Click here to download this week's full edition of Macro Chartmania.
India's economic collapse is not surprising given what is happening all around the world, but it is of paramount importance as the country's contribution to global growth is almost as great as that of the United States. According to the latest IMF forecasts released in mid-April, India should be one of the only major country, along with China, to end the year 2020 with positive GDP growth. The slowdown in growth is however severe and unprecedented. The Indian economy is growing from 4.2% in 2019 to only 1.9% in 2020, counting on the fact that the containment measures taken by the government are effective in stemming the pandemic. Even during the balance of payments crisis of the early 1990s, such a brutal and rapid economic dropout was never observed in the country. All the leading indicators are in free fall: industrial production is out at minus 16.6% YoY in March and is expected to decrease further in April and May on the back of stricter lockdown, non-oil imports dropped at minus 54.4% YoY in April, and vehicle sales and registrations were down at 53.3% YoY in March – both are at historic lows. Looking at the amplitude of the plunge, at some extent, it certainly does not even make sense to annualize data right now.
To cope with the economic consequences of the outbreak, the government has unveiled last week a fiscal stimulus of about 10% of GDP. The actual new package is in fact much smaller than what has been announced since it includes previous measures that already count for 3.8% of GDP. The new support scheme basically refers to tax rate cut for services providers and guaranteed unsecured loans to SMEs. This targeted support to small businesses is welcome as it allows to bypass bank risk aversion to lend and as small businesses are at the heart of the Indian economy (accounting for up to 80% of employment). It is estimated to represent 1.5% of GDP – making India’s SMEs loan support one of the biggest in Asia, along with Taiwan and Japan.
However, India’s economy is not out of the woods yet. Even before the outbreak, the economy was in weak position due poor external demand and, foremost, to the blockages in the financial system. Over the past two years, the government and the RBI have tried with mitigated success to address the liquidity squeeze in the financial sector and to clean-up the mess in the non-bank financial sector. In the wake of the crisis, solvency issues in the financial sector are still a cause of concern. The collapse of a large Indian non-bank financial company could inflict much long term damage to the economy than the COVID-19 and put at risk the entire domestic financial system. To get the economy back on its feet, the government will have to deal more energetically with the risks posed by the local shadow banking than it has done in recent years. A healthy financial system is one of the preconditions for the recovery of the Indian economy.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.