DRISHTIKONE · 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

www.brickworkratings.com

July 2020 1

July 2020

BWR DRISHTIKONE



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]

mailto:[email protected]







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.


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


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.


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.


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.


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


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)

[email protected]

Hemant Sagare

(Senior Manager - Ratings)

[email protected]




July 2020 10


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


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)

[email protected]

Aakriti Sharma

(Asst Manager - Ratings)

[email protected]

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.




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)

[email protected]

Swati Khetan

(Sr. Analyst - Ratings)

[email protected]

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.


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)

[email protected]


July 2020 14


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.


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


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


PSU Corp NBFC

GSEC SBI MCLR HDFC MCLR


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.


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)


July 2020 16

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DRISHTIKONE · 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

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