JUNE 10, 2019

MACRO ECONOMICS
GROUP ASSIGNMENT II
SECTION 2, GROUP 13

Member Name Roll No.

AYUSH GOYAL FT202024

DEBANJANA HALDAR FT202030

JOYDIP SARKAR FT202036
MAYANK CHAWLA FT202043

NISARG UMAKANT KANITKAR FT202049

PRIYANKA AHUJA FT202055
Effect on SENSEX:
FY19 growth slumps to five-year low of 6.8%:
(Source: https://economictimes.indiatimes.com/news/economy/indicators/indias-gdp-growth-slips-to-5-
8-per-cent-in-q4/articleshow/69597967.cms)
There is continues declined in estimated GDP for FY2019. In the first revision it was slumped to 7% and now in the
second revision it has come down to 6.8%. Major factors which are causing these stress in Indian economy are:

US-China Trade war: There is a lot of uncertainty in the global because of regular spate between US-China. It is
impacting the Global Trade and resulting in global slowdown and if there is a global slowdown then it has impact
on every country growth.

Weaker Domestic consumption: NBFC sector is under liquidity pressure because of the default by IL&FS on the
Loan. This pressure on NBFC has resulted in less domestic consumption. Which eventually results in less output.

Now RBI is expected to cut down the interest in coming days in order to increase the investment and consumption
and eventually revive the economy. And also there is expectations of increase in FDI as government has been re-
elected, so looking at the stability foreign investment expected to increase.

Nifty, Sensex hit the record high:

(Source: https://www.moneycontrol.com/news/business/markets/sensex-nifty-wall-of-worries-hit-
record-highs-4059261.html)
Despite of global uncertainties and also slowdown in Indian economy benchmark indices hit the record high price.
Main reason behind this fuelling of indices are fall in crude oil prices, hope of significant cut in interest rate by RBI
and also start of RBI three-day monetary policy meeting boost the sentiment among the investor. RBI meeting
outcome will provide a direction to investor.

Further Investor are keeping sharp eye on global developments, US-China trade talks and crude price movements.
These three factors would be the main driving force of global market in immediate future.

Effect on GDP
Rate-cut Hopes Push Yield to 18-Month Low
THE BENCHMARK YIELD closed at 7.03%, the lowest level since Dec 7, 2017; analysts say fiscal outlook remains relatively
constructive
(Source:https://epaper.timesgroup.com/olive/ODN/TheEconomicTimes
/shared/ShowArticle.aspx?doc=ETM%2F2019%2F06%2F01&entity=Ar00601&sk=29D69393&mode=text)
Growth of Indian economy has been lately sluggish. India recently lost its title of fastest growing economy to
China. The GDP growth has been 5.8% for Q3 2018. However, with the slowing growth, decreasing oil prices,
slowed down local growth and fallen CPI rate cuts have been expected from RBI. It is expected that RBI will further
decrease the interest rates, thus increasing the borrowing capability of people. Given the decrease in oil prices,
this can further propel economic activity especially in manufacturing sector.

Slowing Growth may Lead RBI to Cut Rates 25 bps

Respondents also expect change in monetary policy stance on June 6 to ‘accommodative’
(Source:https://epaper.timesgroup.com/olive/ODN/TheEconomicTimes/shared/ShowArticle.aspx?doc=E
TM%2F2019%2F06%2F03&entity=Ar00302&sk=29B91F18&mode=text)
According to a poll taken by Economic Times, it is felt that RBI may go for a rate cut given the slowness in Indian
economy lately. It is expected that RBI may cut the benchmark interest rate by 25 basis points when on June 6 it

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will announce its bi-monthly monetary policy. It is speculated that the arte cut may vary between 15-35 basis
points. The RBI wants to bring more liquidity in the banking system, to increase the flow of money in the economy.
Due the ongoing polls RBI had maintained a neutral stance on liquidity but now post polls it may shift gears from
neutral to accommodative. RBI expects that a rate cut will spur corporate as well as individual borrowing, inducing
economic activity in the economy. It is also being expected that RBI may announce some measures for the NFBCs,
which are facing a severe capital crunch. Liquidity measures from RBI may help them get over the capital crisis.

Rupee gains against dollar as market anticipates NDA government

(source: https://www.thehindubusinessline.com/markets/forex/indian-rupee-outlook-worsens-on-
trade-war-growth-risks-poll/article27536792.ece)
As our India recently saw a landslide victory of Bharatiya Janata Party, there is a prevalent sentiment of prosperity
and even rupee getting appreciated against the dollar. But due to these US-China trade war conflicts, India is
coming engulfed in this including high oil prices, widening the deficit, depreciating rupee, etc. This trade conflict
reflects no symbol of getting resolved in the coming months, which again worsens the situation for India and is
expected that the rupee will continue depreciating till 2020. The rupee is also hit badly as the United States
preferential treatment given to India as a special privilege ended recently. There are some more rate cuts expected
from Reserve Bank of India as the economy is in slow motion for a long time with low Inflation rates, these factors
also hurt rupee’s ground in the global economy.

Monetary Policies:
RBI Cuts Rate & Softens Stance, But no Reprieve for NBFCs Yet
Lowers repo rate by 25 bps & hints at further cuts, but investors disappointed by lack of liquidity window

(Source:https://epaper.timesgroup.com/olive/ODN/TheEconomicTimes/shared/ShowArticle.aspx?doc=E
TM%2F2019%2F06%2F07&entity=Ar00102&sk=0D612C13&mode=text)
As was widely expected RBI cut interest rates by 25 basis points bring the interest rates down to 5.75% from 6%.
This has been the lowest interest rate in almost a decade. RBI wants to ease more liquidity in the economy to spur
more financial activity. It hopes that decreasing interest rates will enable more borrowing especially individual
borrowing. However, it has announced no change in SLR and repo rate. NFBCs that were hoping a softer stance
from RBI were disappointed. RBI governor said that while reducing the interest rate, they were alos monitoring
the Consumer Price Index and the CPI and inflation is currently capped. So RBI is expecting that decrease in
interest rate will not lead to high cost push inflation.

‘Rate Cut OK, But More Steps Needed to Spur Investment’

TRANSMISSION has lagged for the past two rate cuts this year; weakening investment and falling consumption demand has led to calls
for greater impetus to fuel growth
(Source:https://epaper.timesgroup.com/olive/ODN/TheEconomicTimes/shared/ShowArticle.aspx?doc=E
TM%2F2019%2F06%2F07&entity=Ar00901&sk=146E55D7&mode=text)
As expected, RBI announced 25 basis points rate cut in its bimonthly announcement. However, some feel that this
rate cut is not enough to revive the sluggish economy. With decreasing investments, and slowing GDP rate RBI
needs to do more to increase the money transmission. Since the last 2 monetary policies, RBI has announced rate
cut by 25 basis points. However, the banks have not yet reduced the rate. Thus the transmission of the benefit
from rate cut hasn’t reached the customers. With the growing trade war between US and China, fluctuating oil
prices and unpredictable monsoon, only easing liquidity may not be enough to revive the economy.

GST collection crosses Rs 1 trillion for third straight month in May

(Source: https://www.business-standard.com/article/economy-policy/gst-collection-crosses-rs-1-trillion-
for-third-straight-month-in-may-119060200009_1.html)
In the month of May, the GST collection for the month of May crossed 1 trillion mark for 3 straight months now, a

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7% increase in the collection as compared to April in which GST collection stood at 94,016 cr. Still as per the budget
estimates of 1.14 trillion INR for the month of May, the GST collection is around 14% less than the target.
The GST bifurcation is

CGST: 35,909 cr

SGST:38,900 cr

Key takeaways:
 Since India is eyeing for a robust growth, and recent GDP data
doesn’t encourage the recent government policies. Government
needs to focus on adhering the targets and plug the leakages
from the system.
 Since, the target was not achieved, this could hamper the
forthcoming interim budget of the country.
 From different feedback channels, it was found out that even after 2 years of GST implementation, filling
of the tax is a big concern for many of the small and medium traders.
 In the next GST council meeting, ease of GST filling process is going to be discussed, if it gets the approval
from new finance minister, India could see the rise in the GST collection in forthcoming months. This
could boost government spending, easing the burden of fiscal deficit on the Government.

With major chunk coming in to the government treasury, we can expect more spending & budget allocation in the
infrastructure projects, rural business & farewell schemes, which has the potential to revive country’s falling GDP
data.

Fiscal Changes:
Big reforms a must to sustain GDP
(Source: https://www.financialexpress.com/opinion/big-reforms-a-must-to-sustain-gdp/1596070/)

After Election results, the surge in the Indian stock exchange showcases the faith the investors have in the new
government. But going forward, Government has new challenges on its way. The GDP in the March quarter grew at
just 5.8% year on year and for the FY 19, growth rate was just at 6.8%, which is lowest in last five years. Even
though India has lost its ground as fastest growing Economy, India still has the opportunity to bounce back, given
due reforms and regulations are brought into the system strategically. Due to this, during last few quarters market
is seeing the fall in consumption & demand for goods and services. Due to stagnant economy, no investors are
likely to invest in the market in current scenario. For economy to grow, Investment from private players needs to
come in every sector, be it FMCG, Banking, or Retail. Stagnant market scenario has discouraged many investors,
and to attract investors, new government needs to bring reforms especially in Land acquisition & labor laws. This
will further enhance investment along with more FDI flowing in the economy, causing expansion in consumer
demand and supply owing to competition in the market. After the reforms in taxation by inducting GST, investors
need more clarity on GST policies and seek amendments in GST regulations.

These would bolster investor’s faith and more investment would come up through private players, which could
enhance the stagnant market especially in Rural & Banking sector.

Sitharaman’s difficult choice: Rescuing the NBFCs

(Source: https://economictimes.indiatimes.com/industry/banking/finance/banking/sitharamans-
difficult-choice-rescuing-nbfcs/articleshow/69657896.cms)
Major roadblock in FM Sitharaman’s way is rescuing NBFCs. After IL&FS crisis, 8 months back NBFC sector is having
major issues of liquidity crunch. Industry hasn’t been able to cope with the traditional financing sector such as
Banks. Till now NBFCs have sold assets worth 1.3 lakh crores.

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NBFCs Role in the economy
Lending activity to formal & informal sectors. Key intermediary for small and medium scale industries. Due to
NBFCs crisis, Automobiles sales went down by 17% in the last quarter as NBFCs are the second important lender
for small & medium scale industries.

NBFCs expectations from Government

NBFC is in a very bad shape & all the stakeholders want government & RBI to intervene in this dying sector. NBFCs
want a single borrowing window as against NBFC assets as collaterals be provided from RBIs to bring NBFCs on
track. If RBI can pump in the money in the sector, It would be beneficial not only for NBFCs but its cascading effects
can be seen in other sectors such as Automobiles, Medium scale manufacturers as well. In order to prevent further
escalation of cascading effect in other major industries, Government intervention is a must & new finance minister
needs to a lot for the segment.

Foreign Policies:
End of concessions under GSP

Figure 1: The Hindu_1st June & 2nd June

The GSP (Generalized System of Preferences) in America is a U.S trade perform which is designed to promote
economic growth in the developing world by providing preferential duty free entry for various products. This
allowed beneficiary countries to export various products to the US without the excess amount of duties added to
it. Referring the Indian Express on June 2nd, in 2018, out of total export of $54.4 BIL to US, about $6.3 BIL was
export under GSP, which is going to get impacted now. President Donald Trump stated that India had failed to
deliver equitable and reasonable access to the markets of India and thus the decision of removing GSP facilities.

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 This would impact the overall
competitiveness of India in exports of more
than 1900 items. This could potentially
result in lower GDP of the country, as due
to increased price, some of the Indian
goods might not be sold in US market.

Major Impacts & Way forward

If GSP status is snatched from India, it can
affect India’s export in a very adverse
man.;ner. Due to reduced exports,
manufacturing sector will see a downturn
followed by slowdown in the economy
with rising inflation in the coming fiscal,
causing job loss and hampering the
Figure 2: The Indian Express_2nd June
demand of goods and services.

With India’s latest GDP, which is at 5.8% for March quarter is a big reason to worry for Government. And with
exclusion from GSP status, it might further hamper India’s GDP growth rate.

If India wants to sustain the slowdown & improve on economic front, India needs to negotiate with the US while
maintaining the protectionist approach for its local manufacturers.

Building Indo-US Tension:

Figure 3: The Hindu_1st June

In another incident, while the newly formed Modi govt. is trying to improve foreign policies and build its military
power simultaneously, the US reaction to the Triumf deal between India and Russia is of much importance. India
was supposed to get a sanction for this purchase from US through the CAATSA act. But, due to the aggression of
Russia towards Ukraine, Russia’s involvement in US internal elections, it was clearly stated that India won’t be
getting any grant from US for this. Also this might result in dis-involvement of US from buying or selling other
combat/daily items.

US-China Trade War: Impact on India

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The ongoing feud on trade between the two major economies, US and China is fuelling fear in all of the trading
countries, as it could lead to damage in global economic growth.

As US increased tariffs on $200 BIL worth of Chinese

goods, China retaliated with increasing tariffs
from 5% to 25% on $60 BIL of US goods. This
started when Trump raised heavy tariffs on
Steel and Aluminum from China and China
retaliated by imposing tit for tat tariffs on
billions of dollars’ worth American products.
For India, this could be a golden opportunity in
the manufacturing sector, but could result in
an economic slowdown also if this situation
persists long. As Chinese exporters find it
difficult to export goods due to high taxation,
there is an opportunity for the Indian exporters to fill
the gap. A high potential of FDI increase in India is
possible. Here, currency factor will also be important
Figure 4: The Hindu_2nd June to watch.

India and South Africa on E-Commerce Trade:

India and South Africa, on a joint communication to the WTO have stated that a permanent moratorium on
customs duty on e-transmissions, the developing countries would get impacted the most. Thus WTO should work
on revisiting the existing structure. It was informed that the moratorium is getting extended each time and this has
caused a potential loss of $10 BIL for the developing countries.

Relation with the Neighboring Countries:

Figure 5: The Indian Express_4th June

Figure 6: The Hindu_5th June

The policy “Neighborhood First” by the central government of India, inviting all the leaders of the neighboring
countries (BIMSTEC) was a strategic move to build good relation with them. This week, Modi was going to visit
Maldives and Sri Lanka in another strategic move. The objective here is to reach sustainable growth through
cooperation. The terrorism emanating from Pakistan is quite the threat, thus, relationship with the other
neighboring countries would be beneficial for India. Also this would mean reformed exports and imports for India.

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The Chinese aggression in South China Sea could also be monitored and acted upon. Also India had another
meeting with China regarding the disarmament, non-proliferation and arms control.

Offsetting ties with US and China ito be the core interest:

(source : https://economictimes.indiatimes.com/news/defence/balancing-ties-with-china-and-us-to-be-
jaishankars-focus/articleshow/69606304.cms)
In recent times, we are already going through a rough time due to trade challenges. Amid all this, Afghanistan and
Iran are building ties with China without keeping in mind the interests of India. At this difficult point of time, we
have got S Jaishankar as our new foreign minister in the cabinet which is the best choice to handle such issues.
Jaishankar’s primary motto is to gain membership of Nuclear Suppliers Group for India. There are 48 member
countries of NSG already in which India also wants to be a part of it, but consistently blocked by China to become a
member of same. He will also be focusing on integrating India with international trade blocs including RCEP. India
will be moving towards balancing ties with China and the US. Adding to this, there is an end of the Generalized
System of Preference in India-Sino, so this will be allowing emerging markets to export goods to the United States.

Trade Policies:
Trade between India and China will be more than 100 Billion US Dollars coming year:
(source: https://economictimes.indiatimes.com/news/economy/foreign-trade/india-china-trade-to-
cross-usd-100-billion-this-year-envoy/articleshow/69676323.cms)
As there is already a trade war between the US and China which is also affecting India, there is a silver lining when
it comes to bilateral trade ties between India and China. This trade volume is expected to cross worth 100 billion
US Dollars in this year. As recently, India’s ambassador inaugurated an Indian oleoresin extraction firm which is
being 3rd in the country and help to expand its business in the food industry. It is also significant that economic
and commercial trade engagement between the two countries comprises a major chunk of the bilateral trade. This
trade reached the milestone of 95 billion US dollars last year and the same is expected to reach 100 this year.
China investment in our country has seen a drastic growth in recent years which is beneficial for both economies.

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As a very common example, we can observe that Chinese brands like Xiaomi, Oppo, etc are now household names

in India.

Foreign Investments and Growth In Economy:

FDI in services sector up 37 pc to $9.15 bn in 2018-19

https://economictimes.indiatimes.com/news/economy/finance/fdi-in-services-sector-up-37-pc-
to-9-15-bn-in-2018-
19/articleshow/69661982.cms?utm_source=whatsapp_app&utm_medium=social&utm_campa
ign=socialsharebuttons
FDI inflows in service sector contributes over 60% to the GDP and it accounts for about 18% of the total FDI India
received in last 20 years. In 2018-2019, FDI grew 36.5% to $9.15 billion from $6.7 billion in 2017-2018.

Other sectors that recorded healthy growth in FDI inflows include computer software and hardware, trading,
automobile industry, and chemicals. Overall FDI inflow has declined by 1% as FDI fell significantly in
telecommunication and pharmaceutical sectors and marginally in chemicals sector.

India needs $1 trillion to improve its infrastructure sector to boost growth. India will be able to balance the
payments situation better and rupee value will also strengthen against US dollar.

Weak Global demand and uncertainties of US-China trade war talks impacting metal market severely:
(Source: https://economictimes.indiatimes.com/markets/stocks/news/weak-demand-trade-war-to-
impact-metals-companies-numbers/articleshow/69642853.cms)
In last quarter top companies shows decline in sales and profit after strong seven consecutive quarters. And there
are very good chances that it would come under more pressure in immediate future because of weak global
demand predictions in future. Considering this slowdown any bounce back in their stock prices should be used as
an opportunity to exit.

Many reasons could be attributed to this slowdown in these company:

Trade restrictions in US resulted in cheap imports in India which causes very competitive prices and reduction in
profitability and some Indian companies even have to face loss.

Another reason is the Domestic demand of steel is muted because of slower demand growth in automobile sector
which uses metals to build their vehicles.

Third reason could be the decline in number of offers from countries to import steel amid global slowdown.