INR 111 trillion National Infrastructure Pipeline in India

Accroding to PIB, Task Force on National Infrastructure Pipeline (NIP) submitted its Final Report on NIP for FY 2019-25 to the Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman on 29 April 2020. FM Sitharaman had announced a five-year Rs. 100 lakh crore infrastructure investment in her budget speech 2019-20. NIP is aimed at improving project preparation, attracting investments (both domestic and foreign) into infrastructure. It is considered to be crucial for target of becoming a $5 trillion economy by FY2025. NIP was also featured in FY2021 budget.

The final report of NIP Task Force is projecting total infrastructure investment of Rs 111 lakh crore during the period FY 2020-25 in light of additional/amended data provided by Central Ministries/State Governments since the release of summary NIP Report. Out of the total expected capital expenditure of Rs. 111 lakh crore, projects worth Rs 44 lakh crore (40% of NIP) are under implementation, projects worth Rs 33 lakh crore (30%) are at conceptual stage and projects worth Rs 22 lakh crore (20%) are under development Information regarding project stage are unavailable for projects worth Rs 11 lakh crore (10%). 

Sectors such as energy (24%), roads (18%), urban (17%) and railways (12%) account for around 71% of the projected infrastructure investments in India. The Centre (39%) and States (40%) are expected to have almost equal share in implementing the NIP in India, followed by the private sector (21%).

The report identifies and highlights a set of reforms to scale up and propel infrastructure investments. It also suggests ways and means of financing the NIP through deepening corporate bond markets, including those of municipal bonds, setting up Development Financial Institutions for infrastructure sector, accelerating monetisation of infrastructure assets, land monetisation, etc.

The task force has recommended that three Committees to be setup: (i) Committee to monitor NIP progress and eliminate delays; (ii) a Steering Committee in each Infrastructure ministry level for following up implementation; and (iii) a Steering Committee in DEA for raising financial resources for the NIP. The NIP project database would be hosted on India Investment Grid (IIG).

For NIP, a bottom-up approach was adopted wherein all projects (greenfield or brownfield, under implementation or under conceptualisation) costing greater than Rs 100 crore per project were included.

CBS projects Nepal's GDP to grow at 2.3% in FY2020

On 29 April, Central Bureau of Statistics (CBS) estimated that Nepal’s economy (at basic prices) will likely grow at 2.3% in FY2020, down from 6.7% revised estimate for FY2019. The projected growth rate is lower than the government’s 8.5% target. The growth estimates by CBS is based on the assumption that the COVID-19 affected economic activities will start to pick up pack from mid-May (last quarter) except for tourism activities (hotels & restaurants, and international travel). 

In FY2020, the growth is largely driven by electricity, gas and water output. This might be based on the expectation that the government will be able to bring online Upper Tamakoshi and few other hydropower projects by mid-July as a few large infrastructure projects are not severely affected by COVID-19 pandemic related disruption to labor, supplies and capital.

Overall, agricultural, industrial and services sectors are projected to grow by 2.6%, 3.2% and 2%, respectively. Agricultural sector contributed 0.8 percentage points, industrial sector 0.5 percentage points and services sector 1.07 percentage points to the overall projected GDP growth of 2.3%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May (expect for international tourism). 

Specifically, electricity, gas and water sub-sector is projected to grow at the fastest rate (28.7%, up from 9.1% in FY2019), followed by fishing (7.2%, up from 5.6% in FY2019), health and social work (7.1%, up from 6.8% in FY2019), and public administration and defense  (6.9, up from 5.5% in FY2019). All other economic activities are expected to grow at a rate lower than in FY2019. Construction; mining & quarrying; manufacturing; transport, storage & communications; and hotels and restaurants activities are expected to contract in FY2020. 

Industrial output would have contracted if it were not for the high growth projection for electricity and water sub-sector's output. Delayed monsoon, slow capital spending and lack of business confidence amidst the lower-than-expectation performance of the government had already created an environment where GDP growth was projected to be lower than in FY2019. The strict lockdowns and social distancing rules to contain the spread of COVID-19 exacerbated the slump in economic activities. 

Agricultural output is projected to grow at 2.6%, down from 5.1% in FY2019, largely due to a delayed monsoon, shortage of fertilizers, use of substandard seeds and an armyworm invasion. The labor, harvest and supplies disruptions due to COVID-19 exacerbated the situation. The CBS expects wheat and vegetables output to grow despite the effect of COVID-19 on agricultural market and supply chains. 

Industrial output is projected to grow at 3.2%, down from 7.7% in FY2019. Within industrial sector, electricity, gas and water subsector is expected to grow at the fastest rate: 28.7%, up from 9.1% in FY2019. The CBS expects a substantial addition of hydroelectricity to the national grid by mid-July. All other industrial sector activities are expected to contract. Mining and quarrying activities are projected to grow by -0.7%, down from 8.9% in FY2019, as mining and quarrying of stones, sand, soil and concrete is affected by the lockdowns and social distancing rules. Similarly, Construction activities are projected to contract by 0.3%, down from 8.1% growth in FY2019 as a combination of slow capital spending and the strict lockdowns affected output.  Manufacturing activities are projected to contract by 2.3%, down from 6.8% growth in FY2019. In addition to the COVID-19 related lockdowns and containment measures, manufacturing sector has been suffering from a lack of private sector investment as well as loss of both domestic and external markets due to eroding cost and quality competitiveness. Stable supply of electricity and improved industrial relations were not sufficient to drastically boost manufacturing output as expected. 

Services output is projected to grow at 2%, sharply down from 7.3% in FY2019, making it the most affected sector due to the lockdowns and supplies disruptions. Within service sector, wholesale and retail trade activities are expected to grow by 2.1%, down from 11.1% in FY2019. This reflects a drastic drop in import demand (as remittance-financed imported goods are traded in the domestic market) and sale of agricultural and industrial goods. Since travel and tourism activities were severely affected by COVID-19 pandemic, hotels and restaurants sub-sector is expected to contract by 16.3% and transport, storage and communications by 2.4%. The growth rates in FY2019 were 7.3% and 5.9%, respectively.  Financial intermediation is projected to grow by 5.1%, lower than 6.2% in FY2019, reflecting reduced income of NRB, BFIs, insurance board and companies, securities board, EPF and CIF. Real estate activities are expected to slowdown to 3.3% from 6.1% in FY2019. Education sector is expected to slowdown to 3.0% from 5.1% in FY2019. Public administration and defense is expected to grow at 6.9%, up from 5.5% in FY2019. Similarly, health and social work is expected to growth at 7.1% from 5.7% in FY2019. 

On the expenditure side, GDP (at market prices) is expected to grow at 2.3%, drastically down from 7% in FY2019. Consumption is expected grow at 3.2%, down from 5% in FY2019. However, public and private gross fixed investment and inventory (change in stock) are expected to contract. Net exports is expected to growth at 5.5% (compared to a negative growth rate last fiscal) thanks to a higher rate of decrease in imports compared to exports. 

Here are quick takeaways from the latest GDP projection.

First, the strict lockdowns, supplies and travel disruptions, and social distancing norms have severely affected almost all sectors. Particularly hit are industrial and services sector activities. Overall, consumption slowed down but investment (both public and private) contracted.

Second, GDP growth was projected to be lower than in FY2019 even before COVID-19 pandemic affected Nepal. Delayed monsoon and shortage of inputs had dented prospects for higher agricultural output. Slower than expected capital spending during the first half of FY2020 had affected construction, and mining and quarrying. Industrial sector was in stress due to low capital utilization. Slowdown in remittance inflows had affected services sector activities (particularly, import dependent wholesale and retail trading). The COVID-19 onslaught exacerbated the economic outlook. 

Third, the CBS’s projection might be a bit more optimistic. A majority of the economic activities happen in the second half of fiscal year. This is also the period when COVID-19 hit Nepal and the government resorted to necessary containment measures like strict lockdowns and social distancing. The CBS expects lockdowns to loosen by mid-May and economic activities to gradually normalize. However, this may be challenging because of the disruption to labor and supplies markets and subdued consumer demand. For instance, the dispersal of labor (internal and external migrant workers) is hard to reverse quickly. Contagion conscious businesses may find it hard to fully open shops and activities. Same with casual workers and informal sector workers. It will be challenging to ramp up construction activities for the rest of the year because contract award and work commencement usually happened in the second half. Additionally, if hydroelectricity generation (addition to the national grid) is less than expected by mid-July, then it will affect the growth projections too. 

Fourth, fiscal stress will be heightened as revenue dwindle but expenditure needs shoot up. Employment demand under prime minister employment fund will increase as jobless people resort to making use of social protection schemes (think of it as automatic stabilizer in employment market). Similarly, there will be increased pressure for direct cash transfer to the newly jobless workers and vulnerable groups.

Fifth, with adverse external environment (weak export demand, slowdown in Indian economy, likely fall in remittances and FDI, etc), and weakened internal production, GDP growth in FY2021 might still be muted. Private sector investment may remain subdued given the large uncertainties and additional cost to businesses due to the lockdowns. Worse, some might simply go out of business and default on loan payments. In times like this the public sector really has to ramp up consumption (direct cash and in-kind transfers, support to MSMEs) and investment (high capital spending exploiting the low hanging fruits) to stabilize falling aggregate demand. 

Fiscal deficit in India and rebooting the economy

Govt needs clear 'entry and exit plan' on fiscal expansion: Shaktikanta Das

From Business Standard: The coronavirus pandemic will expand the government’s fiscal deficit beyond 3.5 per cent of India’s gross domestic product (GDP), said Reserve Bank of India (RBI) governor Shaktikanta Das as he called for a "well calibrated roadmap” to manage finances. “The 3.5 per cent fiscal deficit target for this year will be very challenging to meet,” Das told news agency Cogencis in an interview. "It has to be a judicious and balanced call keeping in mind the need to support the economy on one hand and the sustainable level of fiscal deficit that is consistent with macroeconomic and financial stability.” “There has to be a very well calibrated and well thought out roadmap for entry and exit.” The RBI has not yet taken a view on monetising the government deficit.

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Rebooting the economy: India needs a stimulus package of at least 5% of GDP

Ashok Gulati writes in Financial Express: My humble assessment is that this may not take us far enough as the real problem is collapse in demand. And, that demand may not pick up easily as the virus is likely to stay with us for quite some time, and we may again have lockdowns as and when the viral infection surges. This will surely limit our travels and shopping for non-essentials. However, there is one demand that can easily revive, and that is food. The NSSO survey of consumption expenditures for 2011-12 revealed that in an average Indian household, about 45% of the expenditure is on food, and almost 60% of the expenditure of the poor is on food. We do not have information about consumption patterns in 2020, but my guess is that an average Indian will still be spending about 35-40% of their expenditure on food; for the poor, this expenditure would be about 50%. And, herein lies the scope to reboot the economy.

[...]But, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour goes to other parts of India, will face a double challenge. In these states, agriculture, with tiny farm holdings, was already saddled with large labour force, engaging almost 45 to 55% of their total labour force. Non-farm income from wages and salaries, through migrant labour, was one important source of their income. This is now severely hit. In all probability, these staes’ overall per capita incomes in rural areas may shrink, at least in the short run, raising issues of swelling poverty, hunger, and malnutrition. In such a situation, how does one reboot the economy and also take care of a worsening situation on the hunger and malnutrition front?

A special investment package, a la USA’s Marshall Plan in 1948, for the eastern belt of India to build better infrastructure, agri-markets and godowns, rural housing and primary health centres, schooling, skilling will go a long way to revive the economy, and augment incomes of returned migrant labourers in these states. Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to growth engines of agriculture as well as the MSME sector. Building better supply chains for food, directly from farm to fork, led by the private sector will not only augment export competitiveness of agriculture but also ensure a higher share of farmers in consumers’ rupee. This broad-based development in the hitherto laggard region of India will lay down the foundation for the long-term, demand-driven growth of industry in India.

Remittances to South Asia projected to decline by 22.1% in 2020

The latest Migration and Development Brief from the World Bank projects that global remittances will decline by 19.9% in 2020 due to the economic crisis induced by the COVID-19 pandemic and shutdown. Remittances to low and middle-income countries (LMICs) are projected to fall by 19.7% to $445 billion. The fall in FDI is expected to be much larger. 

South Asia is projected to see 22.1% decline in remittances. It is expected to see mild recovery in 2021 but medium-term downside risks persist. The deceleration of remittance inflows is due to COVID-19 outbreak and oil price decline. 

• In India, remittances are projected to fall by about 23% in 2020, to $64 billion, from a 5.5% growth and receipts of $83 billion seen in 2019.
• Remittances to Nepal are expected to decline by 14%, dropping to about US$7 billion in 2020.
• Remittances to Sri Lanka are expected to decline by 19%, dropping to about US$5.5 billion. 
• In Bangladesh, remittances are projected at $14 billion for 2020, a likely fall of about 22%.
• In Pakistan, the projected decline is also about 23%, totaling about $17 billion, compared with a total of $22.5 billion in 2019, when remittances grew by 6.2%.

The COVID-19 presents particular challenges:

1. Economic crisis could be longer, deeper and more pervasive than the recent growth estimates. The decline in fuel prices and lockdowns have affected sectors that depend on migrant workers in host countries. Migrant workers are more vulnerable to employment and wages losses in host countries.
2. It has disproportionately affected food and hospitality, retail and wholesale, tourism and transport, and manufacturing. 
3. Developed countries that depend on migrant workers in agriculture sector will face labor shortages when farming season begins. 
4. Cross-sectoral mobility of workers is affected. It is hard for low-skilled migrant workers to move to other sectors. During the global financial crisis in 2009, many migrant workers moved from construction to agriculture and retail. Now, health and information technology require high and specific skills, which is missing among many migrant workers.
5. Internal migrants without access to housing, basic water and sanitation, health facilities, or social safety nets are more vulnerable to the crisis, especially lockdowns, travel bans, and social distancing measures.

Economic contraction and increase in NPAs

Economy headed for contraction, less fiscal space for big stimulus

From The Indian Express: “It is quite difficult to assess how the economy will react when the lights, which were turned off March 24 midnight, and remain so for 40 days (almost six weeks), are switched on again,” a senior official said. There are many variables: consumer behaviour post lockdown, fear of infection, persistence of social distancing, risk aversion at firm and individual level, the pandemic curve itself, and finally the depth and breadth of government intervention through fiscal measures, and RBI support on the monetary and credit front.

It is this huge uncertainty and “hysteresis” (the unknowns going forward on how the pandemic will play out), which render the exercise of making projections irrelevant. “In the middle of a storm, it is hard to make any assessment, because the task at hand is to ride the storm. Any kind of accuracy will be misleading,” the official told The Indian Express, without wishing to be named.

[...]The impact of an almost six-week lockdown until May 3, with the persistence of social distancing thereafter, and the knock-on effect of these two, will most likely see the Indian economy decelerate in 2020-21, said another analyst with a leading global financial services group. “After the lockdown is lifted, it will definitely not be business-as-usual. A sudden stop in cash flows has put small enterprises under tremendous pressure, with many on the verge of bankruptcy,” the analyst said.

“Salary cuts and job losses in the organized sector will adversely impact discretionary spending by individuals. Consumption, which is almost 60 per cent of GDP, will be severely hit. At the consumer level, discretionary purchases, shopping in malls, eating out, movie halls, travel, and home purchases, may not be forthcoming,” said another economist with a leading investment bank.

At the firm level, proprietorships, micro, mini and small enterprises, will first want to recoup their losses (having had to endure 12 months of costs on 10 months of revenues), and build a nest egg to ensure they are not adversely hit again. This is one big income shock, the economist said.

[...]But a government official said that India, unfortunately, cannot spend like developed economies. “With a BBB- sovereign rating, we still are investment grade. And unlike 2008 when the government’s fiscal was in order and it could manage to give a massive stimulus, it doesn’t have the cushion now. One notch below BBB-, and India will slip into ‘speculative’ grade rating,” he said.

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India’s Path Out of Pandemic Slump Hobbled by Shadow Bank Crisis

From Bloomberg: For India’s financial sector, the coronavirus freeze is just the latest headwind in a multi-year storm that’s dragged down consumption and seen the nation lose its crown as the world’s fastest-growing major economy. Now, if bad loans rise as many including the central bank expect, banks and shadow lenders are set to become ever more cautious just when credit is most needed to keep the economy going.

[...]“India’s financial system has had a rocky few years,” said Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets Pvt Ltd. in Mumbai. “The recognition and provisioning for high loads of bad debt at banks took a toll over 2015-2018, ending with a fallout at the shadow banks.” The seeds of stress were sown even earlier, in a debt-fueled economic boom between 2007 and 2012 when banks increased loans by 400%. When the economy began slowing, many companies struggled to repay debts, making banks reluctant to lend as bad loans piled up.

Some of the slack was then picked up by shadow banks -- lenders that don’t rely on deposits and are typically less regulated. But a default by one of the most prominent of those -- Infrastructure Leasing & Financial Services Ltd. -- in 2018 saw that lending dry up too.

The collapse triggered a credit crunch, forcing the Reserve Bank of India to step in to take control of another shadow lender, Dewan Housing Finance Corp., to contain the fallout. A smaller lender also failed in 2019 after allegedly duping investors about its exposure to a property developer. Then, in March this year, the central bank seized private-sector Yes Bank Ltd. in India’s biggest bank rescue.

[...]“Companies relying on either type of lender for funding, many of which have weak financials, will have difficulty in maintaining liquidity, which can result in defaults on loans from banks and shadow banks,” she said. “As loan losses at shadow banks increase and threaten their solvency, banks’ direct exposures to them can be at risk.” Desperate to avoid such a chain of events, the RBI has injected $6.5 billion into banks to promote lending to shadow banks and small borrowers, further relaxed bad-loan rules and barred lenders from paying dividends in the current fiscal year through March 31 so that they can preserve capital.

Impact of COVID-19 on migration and remittances

Excepts from Peter Gill's article in The Diplomat:

Nepali deaths and illnesses abroad portend long-term trouble for the Nepali economy at home. In the past, international labor migration has been an essential lifeline for Nepali families coping with domestic crises, from a civil war that raged from 1996-2006 to an earthquake that brought homes crashing to the ground in 2015. But the current crisis is unlikely to afford Nepalis this opportunity. Nations worldwide have erected barriers to human movement, and job opportunities from New York to Mumbai to Seoul will likely plummet in the aftermath. COVID-19’s long-term consequences could be devastating for Nepal. A recent World Bank report predicted a severe drop in GDP growth over the next three fiscal years, stating that “the risk of falling into poverty is high, and it will increase into 2020.”

It is difficult to overstate the importance of migration and remittances to millions of Nepali families.  Nepalis have long depended on seasonal agricultural and military work in India, and after 1990, increased access to passports opened up new types of work in destinations from the Middle East to Southeast Asia and beyond. Constructing high-rises in Dubai, guarding private homes in Kuwait, or working on assembly-lines in Penang often paid more than anything available in Nepal.

[...]Migration insinuated itself deep into the Nepali macroeconomy, becoming a keystone on which other sectors depended. “Remittances have been crucial to support growth, particularly by sustaining a high consumption level, which comprises over 85 percent of GDP,” says Chandan Sapkota, an economist at the Nepal Economic Forum. “Remittances have also been crucial in meeting a high revenue growth, as over 45 percent of government revenue is based on duties imposed on import of goods financed by remittance income. Remittances have been the major source of deposits in banks and liquidity.”

The COVID crisis has already put many Nepali migrants out of work. As fears of a pandemic spread in February and early March, a few hundred thousand workers returned to their hometowns and villages in Nepal. But most migrants were prevented from returning after the Nepali government announced a nationwide lockdown on March 24. Some were able to maintain their jobs abroad, but many others were fired or took unpaid leave and are living off meager savings. Reports have emerged of workers being forced into unsafe, crowded conditions in Malaysia and Qatar. In the United Arab Emirates, some Nepalis have been evicted from their homes. Meanwhile, hundreds of Nepalis remain stuck at the Indian border, having walked for hundreds of miles through the Indian lockdown only to be denied entry by the Nepali police. The government maintains that quarantine facilities are inadequate to cope with returnees from abroad.

Falling remittances could have knock-on effects in multiple areas of the domestic economy, harming government revenue and reducing liquidity in the banking industry, says Sapkota, the economist. Along with tourism — another sector sledgehammered by the crisis — remittances are a key source of foreign currency, crucial in an import-dependent country like Nepal. The national bank holds enough foreign exchange reserves to cover more than eight months’ worth of imports – a comfortable cushion in normal times, but then these are not normal times.

Import substitution in India and crowding out of corporate bonds due to high state borrowing

Indian government to chart plan for higher investments

From The Times of India: The government is beginning to reach out to domestic and global investors to work out a strategy for higher investments and reduced reliance on imports in the post-Covid-19 world. During the lockdown, the commerce and industry ministry has had detailed discussions with a group of CEOs on boosting local production of several items, which are currently imported in large quantities, with work on an initial blueprint having begun. Sources told TOI that segments such as mobiles, air-conditioners, auto parts, specialised steel and aluminum products, power equipment, wooden furniture, along with food processing (with potato and orange in focus) are on the table.

Separately, Invest India, the government’s investment promotion agency, had identified over 1,000 global companies across sectors, whom it was reaching out to as part of the “China+1” strategy. “Globally, companies are realising that there is a need to diversify their production bases and India is being pitched as a possible destination. Our plan had slowed down due to Covid-19 but we are in talks with some of them,” a senior government officer told TOI.

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State Govt borrowers are crowding out cash-strapped firms in raising funds

From The Hindu Business Line: Indian companies struggling against the coronavirus pandemic and a domestic credit crunch are facing another obstacle: competition from state governments to sell debt. States are planning to crank up bond sales by 18.2% this quarter from a year earlier to make up for a decline in tax revenue due to an economic slowdown. They usually have lower credit risks than companies, and are offering higher yields than before, which could entice investors. The corporate bond market was already suffering, prompting the RBI on Friday to again inject more money into it. The demand for longer tenor corporate bonds from insurers and pension funds is expected to fall as they shift allocations to state bonds after the recent surge in yields, said Manoj Jaju, chief investment officer at Bharti AXA General Insurance Co. “We too will have a bias toward state bonds over corporate debt now.

[...] But recent cases show how state debt may be more appealing than company securities, even with the extra policy support. Maharashtra state is a case in point. It auctioned 10-year debt on April 7 with an annualized yield of 7.98%, the highest for that tenor since January last year. The latest rate was 44 basis points more than the yield on similar maturity AAA corporate notes. On the same day, REC Ltd., a state-owned financial firm, scrapped plans to sell notes because market participants demanded higher yields.

State bonds are also attractive because they have better trading liquidity in the secondary market compared with corporate securities, said Jaju at Bharti AXA. The State notes are accepted as collateral at the central bank’s repurchase auctions, unlike corporate bonds, providing an added incentive for investors, he said.