drishtikone · countries as “the good”, “the bad” and “the ugly”. canada demonstrated...
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July 2020 1
July 2020
BWR DRISHTIKONE
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July 2020 2
Economy limping back, but normalcy far off
July 2020
GST After Three Years: Need to Stabilise the Technology Platform
It has been three years since the Goods and Services Tax (GST) was implemented with
much euphoria. On the midnight of 1 July 2017, the GST was unveiled in the Central Hall
of the Parliament and was hailed as a great initiative in cooperative federalism. The tax
itself was unique in many ways. This is one of the few cases of subnational GST, and the
only comparable experiments were in Canada, the European Union and Brazil. Sijbren
Cnossen, an acknowledged expert on the subject, characterised the experiences in these
countries as “the good”, “the bad” and “the ugly”. Canada demonstrated to the world
that subnational Value Added Tax (VAT) in addition to the federal VAT is feasible. It
introduced the tax in 1991 with autonomy given to the provinces to determine rates. The
tax is still evolving, and even as recently as in 2013, British Columbia, one of the provinces,
decided to come out of the VAT system after a referendum. In the European Union, joining
the VAT system is a condition for accession. Every country determines its rate structure
and administration, and inter-country transactions are zero-rated. In contrast, in India,
states gave up their fiscal autonomy to determine rates in favour of a harmonised GST
with uniform rates across the country. To ensure a seamless tax credit mechanism, the
IGST was introduced, which required a strong technology platform to track taxes to the
final destination state. A strong technology platform was also a precondition for the plan
of the 100% marching of invoices to verify input tax credit. It was also hoped that the tax
would facilitate exports through quick GST refunds, weed out distortions by removing
cascading and improve tax compliance to make it a “money machine”.
However, three years after the implementation, not many are celebrating. Both, the centre
and states, are complaining about low revenue productivity. Exporters are complaining
about the delay in refunds. Taxpayers complain about high compliance burden, and the
central and state governments are unhappy with the shortfall in revenues. In 2019-20, the
actual revenue collection from Central GST was 24% lower than the budget estimate and
18% lower than the revised estimate. The aggregate revenue collection of the centre and
states from the GST (excluding compensation cess) in the first quarter of this year was
41% lower than revenue collected during the corresponding period last year. In June,
collections rose sharply to Rs 90,917 crore after a dismal collection of Rs 32,294 crore in
April and Rs 62,009 crore in May 2020, mainly due to the lockdown being lifted and
relaxed time schedule allowed by the government for filing GST returns for March and
April.
States are staring at an uncertain future regarding revenue from the GST. They joined the
GST reform on the promise of a generous compensation of a 14% increase every year
over revenue collected from taxes subsumed in the GST in 2016-17. However, the comfort
of this was short-lived. The finance minister categorically stated in her budget speech that
the amount of transfers to the compensation fund will be limited to the amount of
IN THIS ISSUE…
Macro Indicators
Economy Trends
Core Industries and IIP
Inflation and Repo Rate
Crude Oil and INR/USD
Merchandise Trade
Forex Reserves
Government Accounts
Sectoral Indicators
Banking
Automobiles
Telecom
Power
Steel
Debt Market Indicators
Movement in Bond Yields
Yield curve
External Commercial Borrowings
Contacts Dr M Govinda Rao Chief Economic Advisor +91 8040409940 [email protected] Rajat Bahl Chief Ratings Officer +91 22 67456634 [email protected] Anita Shetty Research Editor +91 22 67456633 [email protected] Ria Matwani Research Editor +91 22 67456675 [email protected] Praveen Pardeshi Research Analyst +91 22 67456681 [email protected] Investor and Media Relations +9184339 94686 [email protected]
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July 2020 3
compensation cess collected. With the revenue productivity of the GST continuing to be
low and promised compensation not forthcoming, states are faced with a serious revenue
uncertainty. The uncertainty would be even more serious after the compensation
agreement ends in 2021-22.
In all countries that have implemented the GST, it takes time to settle down, and in India
too, the GST has been evolving. The most important reform needed now is to rationalise
the rate structure to minimise the number of rates. Excessive rate differentiation results
in misclassification, anomalies, and an inverted duty structure. There are at least seven
rate categories in addition to cess at varying rates on certain supplies. The recent
discussion on social media platforms about higher tax rates on “parathas” over “rotis” is
not an isolated issue. The differential tax rates on silk and jute (exempted), cotton, and
natural (5%) and man-made fibres (18%) creates anomalies and an inverted duty structure
on blended fabrics. Rate differentiation according to the stage of production, value of
supply and the use of the commodity also creates anomalies.
However, the initiative for a reform comes only when the comfort of revenue buoyancy
exists. This is possible only when tax compliance improves. In the case of the GST, the
failure to stabilise an effective technology platform has rendered it virtually a voluntary
tax. The original idea of having three returns every month and 100% matching invoices
for verifying input tax credit has failed to take-off. The monthly return prescribed now
does not have the details of input purchases and cannot be used to verify input tax credit.
Annual return filing, which is supposed to contain the details to facilitate verification, has
been repeatedly postponed, and now the last date prescribed is 31 March 2021. This has
resulted in the mushrooming of a fake invoice industry with compliance taking a plunge.
There cannot be any excuse for the technology service provider and the GSTN for not
firming-up the technology platform even after three years, and the GST Council must take
this issue up on priority. Immediate action on this issue is imperative, and hopefully, the
GST Council will act on it expeditiously.
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July 2020 4
Annexure: Select Macro Economic and Sectoral Indicators
Indicators/ Sectors 2017-18 2018-19 2019-20 Jun-
2019
Jul-
2019
Aug-
2019
Sep-
2019
Oct-
2019
Nov-
2019
Dec-
2019
Jan-
2020
Feb-
2020
Mar-
2020
Apr-
2020
May-
2020
Jun-
2020
Economy
GDP at 2011-12 Prices Y-o-Y in % 7.04 6.12 4.18 5.24 - - 4.42 - - 4.08 - - 3.09 - - -
GVA at 2011-12 Prices Y-o-Y in % 6.59 6.04 3.89 4.76 - - 4.33 - - 3.47 - - 3.04 - - -
Agriculture Y-o-Y in % 5.93 2.41 4.05 2.97 - - 3.51 - - 3.60 - - 5.87 - - -
Industry Y-o-Y in % 6.35 4.88 0.92 4.18 - - 0.50 - - -0.31 - - -0.58 - - -
Services Y-o-Y in % 6.92 7.74 5.55 5.52 - - 6.52 - - 5.67 - - 4.44 - - -
Banking
Gross Bank Credit Y-o-Y in % 8.37 13.29 6.13 11.86 12.12 10.24 8.74 8.93 7.25 6.95 8.06 6.93 6.13 6.70 6.20 -
Bank Credit to Industries Y-o-Y in % 0.73 6.91 1.40 6.45 6.12 3.87 2.71 3.36 2.36 1.64 2.48 0.70 1.40 1.70 1.70 -
Deposit Y-o-Y in % 6.20 10.04 7.90 10.37 9.57 9.73 9.38 10.25 9.52 9.65 11.08 10.20 7.90 9.80 10.50 -
Industry
Manufacturing PMI Index 51.60 52.80 52.33 52.10 52.50 51.40 51.40 50.60 51.20 52.70 55.30 54.50 51.80 27.40 30.80 30.80
IIP Y-o-Y in % 4.40 3.80 -0.70 1.30 4.90 -1.40 -4.60 -6.60 2.10 0.40 5.20 -18.32 -57.63 -34.71 -
Manufacturing Y-o-Y in % 4.60 3.90 -1.30 0.30 4.80 -1.70 -4.30 -5.70 3.00 -0.30 3.80 -22.41 -67.12 -39.32 - -
Consumer Durables Y-o-Y in % 0.80 5.50 -8.40 -10.20 -2.40 -9.70 -10.50 -18.90 -1.40 -5.60 -3.70 -6.20 -36.50 -96.00 -68.50 -
Eight Core Y-o-Y in % 4.28 4.37 0.40 1.22 2.64 -0.19 -5.12 -5.49 -0.62 2.14 2.18 7.10 -9.00 -37.00 -23.40 -
Auto Sales Y-o-Y in % 14.30 5.10 -17.95 -12.33 -18.67 -23.51 -22.39 -12.73 -12.02 -13.08 -13.83 -19.10 -45.00 - - -
Passenger Vehicles Y-o-Y in % 7.90 2.70 -17.82 -17.51 -30.96 -31.57 -23.68 0.29 -0.83 -1.21 -6.19 -7.60 -51.10 -100.00 -86.00 -
Commercial Vehicles Y-o-Y in % 20.00 17.60 -28.74 -12.22 -25.66 -38.71 -39.06 -23.36 -14.98 -12.32 -14.04 -32.90 -88.10 - - -
Two & three Wheelers Y-o-Y in % 15.10 5.00 -17.47 -11.59 -16.48 -21.71 -21.49 -14.03 -13.64 -15.30 -15.12 -20.20 -40.60 - - -
Power Generation Y-o-Y in % 5.40 3.60 - 11.12 5.67 -0.25 -3.72 -13.40 -6.80 -1.88 2.43 10.00 -9.00 -25.00 -18.00 -
Steel Consumption Y-o-Y in % 7.90 8.80 0.72 7.97 8.45 4.52 -4.23 2.90 2.68 1.68 3.55 -6.40 -29.40 -87.30 -48.30 -
Cement Consumption Y-o-Y in % 6.60 13.90 - -1.99 7.83 -5.58 -2.17 -8.07 4.21 5.47 5.00 8.60 -22.70 - - -
Domestic Passengers
carried by
Airlines
Y-o-Y in % 18.00 13.70 0.71 6.18 3.01 3.87 1.18 3.98 11.18 2.56 2.20 9.00 -33.00 -100.00 -86.00 -
External Sector
Exports USD Bn 29.32 32.72 21.41 25.02 26.23 26.04 26.10 26.48 25.94 27.36 25.97 27.65 21.41 10.36 19.05 -
Imports USD Bn 42.82 43.72 31.16 41.03 40.43 39.82 37.64 37.41 38.11 38.61 41.15 37.50 31.16 17.12 22.20 -
Exchange Rate INR per USD 65.02 69.48 75.39 68.92 68.86 71.76 70.69 70.81 71.73 71.27 71.51 72.19 75.39 75.12 75.64 75.64
Brent Crude Oil USD per barrel 69.02 67.93 14.85 67.52 64.07 61.04 60.99 59.30 64.50 69.26 57.77 56.70 14.85 18.11 34.15 34.15
Forex Reserves USD Bn 424.36 411.91 475.56 427.68 429.65 428.60 433.59 442.58 451.09 457.47 471.30 476.12 475.56 481.08 493.48 493.48
Inflation
CPI Y-o-Y in % 4.28 2.86 4.77 3.18 3.15 3.28 3.99 4.62 5.54 7.35 7.59 6.58 5.91 - - 6.09
Core Y-o-Y in % 5.22 5.05 4.04 4.11 4.28 4.24 3.99 3.46 3.54 3.82 4.16 4.02 4.03 - - 5.40
WPI Y-o-Y in % 2.74 3.10 1.69 2.02 1.17 1.17 0.33 0.00 0.58 2.59 3.10 2.26 1.00 -1.57 -3.21 -1.81
Food Y-o-Y in % 0.00 3.59 6.92 5.41 4.90 5.90 6.12 7.65 9.09 11.05 10.12 7.31 5.49 4.38 2.31 3.05
Interest Rates
Repo Average Rate 6.00 6.25 4.40 5.75 5.75 5.40 5.40 5.15 5.15 5.15 5.15 5.15 4.40 4.40 4.00 4.00
10-year Benchmark Average Rate 7.84 7.47 6.80 7.05 6.75 6.81 6.97 6.65 6.76 6.89 6.98 6.76 6.80 6.80 5.96 5.96
10- year AAA Corporate
Bond
Average Rate 8.75 8.55 7.60 8.30 8.08 7.81 8.02 7.93 7.88 7.90 7.97 7.55 7.60 7.86 7.25 6.85
5- year Benchmark Average Rate 7.79 7.07 6.20 6.95 6.51 6.52 6.64 6.54 6.52 6.77 6.66 6.27 6.20 6.07 5.64 5.64
5- year AAA Corporate
Bond
Average Rate 8.35 8.19 7.30 8.10 7.70 7.55 7.59 7.35 7.55 7.35 7.38 7.02 7.30 7.42 6.85 6.15
MCLR of SBI (1 year) Average Rate 8.15 8.55 7.80 8.45 8.40 8.25 8.15 8.05 8.00 7.90 7.90 7.85 7.80 7.40 7.25 7.00
Call Money Average Rate 5.91 6.21 4.90 5.73 5.58 5.37 5.30 5.04 4.95 4.99 4.90 4.93 4.90 4.15 3.83 3.57
Notes: Data is provisional for the latest months and annual growth rates are average for the full fiscal, -: Not available, *: At the end of the period.
Source: MOSPI, RBI, eaindustry.nic.in, IHSmarkits.com, SBI, CMIE, FIMMDA, BWR Research
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July 2020 5
MACRO-ECONOMIC INDICATORS
Economy Trends
The GDP growth rate decelerated sharply to 3.1% in FY Q4, and this slowdown in growth was
witnessed in all sectors except agriculture, mining and quarrying, and public administration and
defence. Accordingly, full-year growth has been revised downwards to 4.2% from the earlier
estimates of 5% for 2019-20. The pandemic situation has created considerable uncertainty and
significant downside risks to domestic growth for the current fiscal.
* Provisional Estimates by MOSPI, # BWR Estimates, Source: Mospi, BWR Research
The resumption in economic activities is evident from the improvement in early indicators such as
the PMI index for June, eight core sectors’ production and IIP. The contraction continued, albeit at
a slower rate than in the previous months. IIP numbers released by the MOSPI for April and May
give only the partial picture of the negative impact of the Covid-19 containment measures.
Source: MOSPI, eaindustry.nic.in, IHS Markit, BWR Research
4.0%
0.9%
5.5%
3.9% 4.2%
3.0%
-6.7%-6.0%
-4.9%-5.5%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Agriculture Industry Services Gross ValueAdded
Gross DomesticProduct
Annual GDP Estimates
2019-20 # 2020-21 *
20
25
30
35
40
45
50
55
60
-80.0
-70.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
Ap
r-1
9
May
-19
Jun
-19
Jul-
19
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
De
c-1
9
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Manufacturing PMI and Y-o-Y growth in IIP and Core industries (%)
Manufacturing PMI (Right Axis) Manufacturing in IIP
IIP Eight Core Industries
BWR Views
Amid the partial withdrawal of
the lockdown in major parts of
the country, we expect economic
activity to pick up gradually.
Other than agriculture, no major
economic activity has been
happening on the ground in the
most part of the first quarter due
to continued social distancing
measures. The majority of the
industrial sector establishments
were not operating since the end
of March 2020.
The temporary shortage of
labour, in addition to demand
and supply compression, is likely
to maintain subdued economic
activities in the second and third
quarters as well, and we expect
some recovery only in the fourth
quarter if the pandemic situation
subsides.
We continue with our
expectation of a 5.5%
contraction in the GDP for 2020-
21.
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July 2020 6
Inflation and Monetary Policy Action
CPI inflation came at 6.09% for June, which is above the upper limit set in the monetary policy
framework. The MOSPI released the combined inflation data after a gap of two months as in April
and May, the government released the price movement of only selective sub-groups/groups of the
CPI following the limited transactions of products in the market. If we compare the March inflation,
which was eased to 5.84% from 6.58% in February 2020, the current increase in inflation is largely
due to supply-side constrains. This is evident in the food inflation rate, which remained high, at 9.2%
in May, although it eased to 7.89% in June.
Source: Ministry and Programme Implementation (MOSPI), RBI, BWR Research
Merchandise Trade
The coronavirus outbreak, which resonated across economies, began to disrupt global and
domestic trade. Merchandise exports and imports witnessed a sharp fall in March 2020 due to the
imposition of the lockdown, and the situation worsened further in April. Exports witnessed a gradual
recovery in May due to the easing of the lockdown; however, imports continued to shrink and
reported a 72% contraction compared with the corresponding period a year ago due to the border
dispute between India and China, leading to supply disruptions for imports.
Source: Ministry of Commerce, BWR Research
-18000
-16000
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0-70.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Mar-
20
Ap
r-20
Ma
y-2
0
India's Merchandise Trade Balance (USD mn)
Trade Balance (RHS) Exports (y-o-y in %) Imports (y-o-y in %)
BWR Views
The imposition of the lockdown
created production disruptions,
and the continued lockdown
situation in major parts of the
country in addition to the spill-
overs of the global economic
fallout are likely to burden both
imports and exports. Amid the
border dispute between India
and China, restrictions on
imports would further aggravate
the trade situation. However, oil
prices at below USD 50 per barrel
provide some respite on the
import bill; otherwise, both
imports and exports are likely to
face severe destruction as long
as the current pandemic
continues to exist.
6.005.75
5.405.15
4.404.00
5.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0M
ar-
19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Feb-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Y-o-Y CPI Inflation and Repo Rate (in %)
Repo Rate CPI Inflation
BWR Views
The sharp fall in crude oil prices
helped the inflation to soften in
March. However, both centre
and state governments have
raised taxes, which led to a rise in
petrol and diesel prices recently.
Fuel inflation is also on the rise
from the previous month's level.
Spill-overs of the hike in petrol
prices in addition to supply side
constraints, are likely to exert
inflationary pressures in July also.
BWR expects CPI inflation to
remain above the upper band
target of the RBI MPC at 6% in
the current fiscal.
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July 2020 7
Forex Reserves and Import Cover
Foreign exchange reserves crossed the $500 billion mark in June 2020, with more than a $13 billion
increase in a single month. The current forex reserves level gives much-needed comfort to absorb
external shocks, such as exchange rate volatility, at a time of deteriorating economic activities.
Source: Ministry of Commerce, RBI, BWR Research
Crude Oil Prices and INR/USD Rates
Amid the coronavirus scare and consequent contraction in oil demand in addition to excess supply,
oil prices fell to record lows in April. However, since May, prices started moving upwards as oil-
producing nations had cut output to reduce excess supply. The Indian basket of crude oil crossed
USD 40 per barrel in June from a low of USD 19 per barrel in April. On the other hand, despite
mounting concerns over fiscal constraints and looming economic uncertainty, the rupee remained
stable largely due to the increase in FPI inflows.
Note: The Indian basket of crude oil represents a derived basket consisting of Sour grade (Oman and Dubai
average) and Sweet grade (Brent dated) of crude oil processed in Indian refineries)
Source: Ministry of Petroleum & Natural Gas, FBIL, BWR Research
50715.3
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
0
100
200
300
400
500
600
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Forex Reserves and Import Cover
Foreign Exchange Reserves (USD bn) Import Cover in months (RHS)
40.6
75.7
64.0
66.0
68.0
70.0
72.0
74.0
76.0
78.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Cru
de O
il P
rices in
$ B
arr
el
Crude oil Prices and Rs per US Dollar
Crude oil (Indian Basket) Rs/$ (RHS)
BWR Views
The expected contraction in oil
demand due to a global
economic slowdown indicates a
lower oil price outlook. If oil
prices remain below the level of
USD 40 per barrel for long, it will
provide the much-needed fiscal
and monetary space with a lower
import bill.
BWR Views
The potential consequences of
the coronavirus pandemic on the
domestic economy, coupled with
fiscal constraints, in addition to
the fear of a sovereign
downgrade, the pressure on the
Indian rupee intensifies. With
abundant forex reserves, which
help the RBI to intervene in the
forex market whenever required,
we expect the rupee to remain at
Rs 75-76 per USD in the current
fiscal.
www.brickworkratings.com
July 2020 8
Government Finances
As per the latest data (provisional) available for 2019-20, the fiscal deficit surged to 4.6% of the GDP
(BWR estimates 4.5%), against Budget Estimates (BE) of 3.8% due to the Rs 1.5 trillion shortfall in
gross tax revenue. In the current fiscal so far, the revenue collection has fallen sharply, whereas
expenditure has gone up, leading to a surge in both revenue deficit and fiscal deficit.
Note: Data is provisional, Source: Controller General of Accounts (CGA), BWR Research
Revenue Collection through GST
The GST revenue collection for the first quarter of 2020-21 is 41% lower than the corresponding
period of 2019-20, reflecting how Covid-19 has disrupted normal economic activities. Relaxations
given by the government in filing returns and the payment of taxes due to the pandemic and
lockdown also impacted revenue collections; however, there is a sequential recovery in the GST
collected in June, compared with that in April and May.
Source: Ministry of Finance, BWR Research
1,139
1,003 9991,047
323
620
909
617
0
200
400
600
800
1,000
1,200
April May June Average (Q1)
GST collection (Rs billion)
2019-20 2020-21
BWR Views
GST collections are likely to
improve in the coming months
from the current levels, but slow
progress in economic activities,
coupled with an extended
lockdown in certain states, may
lead to a significant revenue loss.
BWR Views
Given the expectation of a 5.5%
contraction in the economy, tax
revenue is also expected to
decline in 2020-21. Stalled
economic activity may lead to an
acute shortage of revenue,
whereas increased expenditure
through stimulus measures is
likely to keep government
accounts under pressure in
2020-21. The government has
already announced it would
borrow Rs 12 lakh crore, which is
54% more than the budgeted
amount for 2020-21, to bridge
the fiscal deficit gap. Yet, a sharp
slippage in the fiscal deficit from
the targeted 3.5% for 2020-21 is
unavoidable.
22,459
455
30,422
5,118
(7,963)(4,663)
(6,092)(4,120)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2020-21 (BE) 2020-21 (Up to May)
Govt Accounts: Trends in Revenue and Expenditure (Rs Bn)
Total Receipts Total Expenditure Fiscal Deficit Revenue Deficit
www.brickworkratings.com
July 2020 9
SECTORAL INDICATORS
Banking
The gross bank credit decreased by 1.7% to Rs 91,08,882 crore as of 22 May 2020 from Rs 92,63,134
crore as of 27 March 2020. During this period, while the food credit increased by Rs 27,545 crore,
non-food credit decreased by Rs 181,797 crore mainly due to a slowdown in business and services
across the industry as a result of the nationwide lockdown.
Decline in non-food credit has been witnessed across the sectors, led by personal loans by Rs 74,790
crore, followed by services by Rs 51,875 crore and industry by Rs 43,544 crore. Having said that, the
sector-wise credit exposure to gross bank credit continues to be maintained at March 2020 levels,
i.e. agriculture at 12.5%, industry at 31.5%, services at 28.1% and personal loans at 27%.
In the April 2020 issue of Drishtikone, BWR had opined on a slew of initial measures taken by the
Government of India and RBI to safeguard the domestic economy from the COVID-19 pandemic.
The Union Government has extended the nationwide lockdown 5.0 with relaxed norms to help
revive the economy. The phase-wise opening-up of the economy shall enable the resumption of
business and services in a gradual manner while continuing to maintain social distancing as an
overall safety measure.
The Union Government and RBI in May 2020, announced critical measures to pump in a series of
liquidity boosters into India Inc. This includes the major announcement of the “Aatmanirbhar Bharat
Abhiyan” package announced by the Government, which covers the majority of the Indian economy.
The RBI also announced a set of regulatory measures to largely address the working capital
challenges of corporate India over the near term.
As of 30 June 2020, under the Emergency Credit Line Guarantee Scheme, banks have sanctioned
credit amounting to over Rs 1.1 lakh crore to Medium, Small and Micro Enterprises (MSMEs);
although disbursals are currently at lower levels of less than 50%, these are expected to improve in
the near to medium term. MSME borrowers while availing such loans (100% guaranteed by GoI) are
concerned about the interest cost linked to these loans. Increased awareness of such interest costs
being linked to the repo rate, which effectively is lower than the rate for its existing working capital
loans, may boost credit to MSME.
Source: RBI, BWR Research
-1.8%
-0.3%
-2.5%
-5.3%
0.9%
-1.7%
1.0%
-1.5%
-2.0%
-2.9%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
Overall BankCredit
Agriculture Industry Services Retail loans
Banking - Sectoral Credit Growth
YTD May 2019 YTD May 2020
BWR Views
Given the continued uncertainty
on the resumption of business
would remain over the near to
medium term, BWR views the
bank credit to remain subdued
during this period. Various
measures are initiated by both,
the Government of India and the
Reserve Bank of India,
periodically. Measures to ensure
safe and healthy commutation in
the working environment and
the prudent disbursal of loans to
the businesses and services
across the industry may enable
the early revival of business, as
well as maintain prudent asset
quality through enhanced credit
flow.
Vydianathan Ramaswamy
(Director & Head - Financial
Sector Ratings)
Hemant Sagare
(Senior Manager - Ratings)
www.brickworkratings.com
July 2020 10
Source: RBI, BWR Research
Automobiles
Domestic automobile sales were largely muted in April and May 2020 due to complete business
closures for the most part of these months. For June 2020, sales are estimated to have shown some
improvement, that too in the two-wheeler segment only. This improvement is largely on account of
a healthy rural demand scenario. The rural area has not been much impacted by the pandemic and
as it has its dependency on agriculture and related activities, the livelihood of people has not been
affected.
.
Note: Latest data is not available. Source: CMIE, BWR Research
For the full year 2019-20, overall automobile sales were down by 18%, with CV sales falling by nearly
30%. An increased cost of ownership, revised axle norms, financing issues due to the NBFC crisis,
the economic slowdown and subdued consumer sentiments contributed towards weak automobile
sales in FY20.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Mar-
20
Ap
r-20
Ma
y-2
0
Banking - Sectoral Credit Growth y-o-y
Agriculture Industry Services Retail loans
BWR Views
Domestic automobile sales will
be significantly impacted, going
forward, due to an anticipated
cut in discretionary spending by
consumers. However, the two-
wheeler segment will see some
traction due to anticipated
healthy demand in rural areas
owing to the expectation of a
normal and well-distributed
monsoon. The preference for
personal mobility due to safety
concerns will provide some
support to two-wheelers and
passenger vehicle sales.
-100%
-80%
-60%
-40%
-20%
0%
20%
Ma
r-19
Ap
r-19
Ma
y-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Feb-2
0
Ma
r-20
Automobile Sales (Growth y-o-y)
Passenger Vehicles Commercial Vehicles
Two & Three Wheelers Exports
www.brickworkratings.com
July 2020 11
Power
The power sector's situation has worsened since the lockdown was imposed, with demand falling
by more than 30%, that too from the high-volume and high-paying customers (industrial users and
railways). While demand has revived to some extent post the lockdown relaxations being
announced in various regions, it continues to remain lower than February levels.
Source: Central Electricity Authority, BWR Research
Solar power tariffs, which have come down considerably over the last few years, have hit a new low
of Rs 2.36/kWh in the recent auction by the SECI, making solar the cheapest source of power. The
tariffs have been declining on the back of a fall in the cost of solar modules (sourced primarily from
China), which form nearly 60% of the cost of these projects. However, with the call of a ban on all
Chinese products and the Government's motto of Atmanirbhar Bharat, the viability of such low
tariffs is a major concern. If low-cost Chinese modules are not available to these entities, their cost
of projects may go up significantly, considering the domestic modules are not as competitively
priced. Additionally, even if they are allowed to import modules, with the imposition of the basic
customs duty from 1 August 2020, whether there is a major impact on the cost or a pass through is
available to these players is to be seen.
Source: Central Electricity Authority, BWR Research
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%M
ay-1
9
Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Power Generation (Growth y-o-y)
Thermal Nuclear Hydro Renewables
-1.5%
0%
-0.3% -0.2%
-3.0%
-0.6%-0.9%
0% 0% 0%
-2.9%
-0.3%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
Northern Western Southern Eastern North Eastern All India
Power Supply Position - Peak (Surplus/Deficit)
May 2019 May 2020
Vipula Sharma
(Director - Ratings)
Aakriti Sharma
(Asst Manager - Ratings)
BWR Views
A pick-up in economic activity
and industrial output is critical
for power demand to revive,
which in turn, is imperative for an
improvement in the financial
condition of power plants.
www.brickworkratings.com
July 2020 12
Steel
With the easing of lockdown restrictions, production and sales in the steel industry have started
picking-up positively; however, there is a long way to go for bouncing back to the pre-covid level
of demand in the steel sector. Indian steel companies have gained from the increased levels of
export of semi-finished goods to China and European countries during the last few months. Overall
exports of semi-finished steel rose 66% Y-OY in April 2020, but with less margins comparatively.
Source: CMIE, BWR Research
As envisaged in our June 2020 Drishtikone, which stated, “The infrastructure sector is likely to
contribute substantially to revive demand in the Steel sector“, it can be seen that demand in the
month of June mainly came from the infrastructure sector.
43,000
45,000
47,000
49,000
51,000
53,000
55,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000Jun
-19
Jul-1
9
Au
g-1
9
Se
p-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Feb-2
0
Ma
r-20
Ap
r-20
Ma
y-2
0
Jun
-20
Steel Production & Prices
Finished steel production (000 tonnes) Finished steel consumption (000 tonnes)
Finished steel prices (Rs per tonne) (RHS)
Bal Krishna Piparaiya
(Senior Director - Ratings)
Swati Khetan
(Sr. Analyst - Ratings)
BWR Views
The outlook on the steel sector is
negative for the coming few
months, with a dip in operating
margins. BWR expects the
infrastructure sector to
contribute substantially to revive
demand for the steel sector. The
current step taken by the
government to engage
consultancy firms to revive the
sector may help in coming up
with some major policy changes
impacting the sector positively.
www.brickworkratings.com
July 2020 13
DEBT MARKET INDICATORS
Movements in Bond Yields
The bond yield in India has been moving southward for the last one year at a faster pace during the
last 6 months, which is in tandem with yields dropping globally, influenced by various policy rate
cuts, liquidity and revival packages that were initially announced to combat the impeding recession
and then followed to combat the Covid-19 impact. In fact, the 10 years’ US T- bill yields have
dropped by more than half in the last 6 months.
Meanwhile, the G-sec Yield curve has shifted downward more at the shorter end than the longer
end (which normally happens in such a period of fiscal expansion) as the yields have moved down
by about 180 bps for the 6-month and 1-year tenure, 200 bps for 3-year, 150 bps for 5-year, 120
bps for 10-year and 70 bps for the 30-year tenure. There is marked decline in yield of the prime
rated AAA bonds as well, and their spreads over the G-sec have shrunken. However, the investors
are varied of the perceived risk in bonds, particularly the AT-1 and NBFC, wherein yields have not
moved down so much.
The bond yield (annualised) issued by Public Sector Units (PSUs), corporates and Non-Banking
Finance Companies (NBFCs) maturing in 5, 3 and 1-year tenures with the corresponding
government securities and Marginal Cost of funds-based Lending Rate (MCLR) of banks is provided
below.
Source: FIMMDA, SBI, HDFC, BWR Research
BWR Views
BWR expects a further drop in
yields in AAA/AA bonds on
account of the return of investors
influenced by various revival
measures ushered by the
government and regulators. The
trading volumes and fresh issues
in the market are dominated by
safer sectors, and Covid-19-
impacted sectors such as
aviation, hospitality and real
estate are under weights.
3.503.904.304.705.105.505.906.306.707.107.507.908.308.70
04-M
ay
08-M
ay
13-M
ay
18-M
ay
21-M
ay
27-M
ay
01-J
un
04-J
un
09-J
un
12-J
un
17-J
un
22-J
un
25-J
un
30-J
un
5-year AAA Corporate Bond yields vs Gsec yield, MCLR
PSU Corp NBFC
GSEC SBI MCLR HDFC MCLR
Bal Krishna Piparaiya
(Senior Director - Ratings)
www.brickworkratings.com
July 2020 14
Source: FIMMDA, SBI, HDFC, BWR Research
Yield of AAA-rated corporate bonds maturing in 5-, 3- and 1-year tenures have eased by 11-98 bps
as investor confidence is witnessed to be returning on the resumption of operations amid the
outbreak of the coronavirus pandemic. The Government of India and RBI have announced various
revival measures such as providing cheaper Government-guaranteed credit and liquidity through
innovative tools such as TLTRO for corporates and NBFCs to mitigate their risks and business losses.
Source: FIMMDA, SBI, HDFC, BWR Research
3.503.904.304.705.105.505.906.306.707.107.507.908.308.70
04
-May
08
-May
13
-May
18
-May
21
-May
27
-May
01
-Ju
n
04
-Ju
n
09
-Ju
n
12
-Ju
n
17
-Ju
n
22
-Ju
n
25
-Ju
n
30
-Ju
n
1-year AAA Corporate Bond yields vs Gsec yield, MCLR
PSU Corp NBFCGSEC SBI MCLR HDFC MCLR
3.503.904.304.705.105.505.906.306.707.107.507.908.308.70
04-M
ay
08-M
ay
13-M
ay
18-M
ay
21-M
ay
27-M
ay
01-J
un
04-J
un
09-J
un
12-J
un
17-J
un
22-J
un
25-J
un
30-J
un
3-year AAA Corporate Bond yields vs Gsec yield, MCLR
PSU Corp NBFC
GSEC SBI MCLR HDFC MCLR
www.brickworkratings.com
July 2020 15
Yield curve of AAA PSUs, NBFCs, Corporates and G-sec
The borrowing costs for bonds maturing in one year issued by the government, PSUs, NBFCs and
corporates continued to soften in June by 259-331 bps, against the corresponding period last year
due to several measures taken by regulators to deepen the bond market. The key policy rate (repo
rate) softens by 175 bps during the same period.
Source: FIMMDA, BWR Research
External Commercial Borrowings
According to RBI data, Indian corporates borrowed around $1.5 billion from offshore markets in the
form of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs)
during May 2020. The offshore borrowings have reduced due to Covid-19 as the economic activities
of the corporates have reduced drastically on the back of the lockdown.
Source: RBI, BWR Research
BWR Views
Going forward, Indian
companies’ borrowing through
ECB will depend on the revival of
their activities and production
and also on the stability of their
credit ratings.
6.95
4.27
7.387.29
4.65
6.06
3.74
5.755.40 5.40
5.15 5.15 5.15 5.15 5.154.40
4.404.00 4.00
3.503.904.304.705.105.505.906.306.707.107.507.90
Jul-
19
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
1-year rolling monthly yield curve for AAA PSU, NBFC, Corporate and GSEC
PSU NBFC Corp GSEC RBI Repo Rate
27
14
21
75
48
27
17
06
14
11
20
66 3
80
6
24
17
28
12
12
72
5
31
58
34
85
53
99
49
81
33
17 4
88
9
34
15
21
16
20
97
77
69
41
75
74
37
99
6 14
90
0
2000
4000
6000
8000
10000
12000
14000
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
ECB ($mln)
ECB FY19 ($ mln) ECB FY20 ($mln)
www.brickworkratings.com
July 2020 16
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