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Moody's slashes India's FY20 growth forecast to 5.8%

11 Oct '19

4 min read

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Moody’s Investors Service recently cut its 2019-20 gross domestic product (GDP) growth forecast for India to 5.8 per cent from the earlier 6.2 per cent , saying the economy is witnessing a pronounced slowdown that is partly related to long-lasting factors. The projection is lower than 6.1 per cent that the Reserve Bank of India (RBI) had forecast last week.

The deceleration was attributed by Moody’s to an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation, according to a news agency report.

It expected growth to pick up to 6.6 per cent in 2020-21 and to around 7 per cent over the medium term.

“Although we expect a moderate pick-up in real GDP growth and inflation in the next two years, we have revised down our projections for both. Compared with two years ago, the probability of sustained real GDP growth at or above 8 per cent has significantly diminished,” it said.

Last month, the Asian Development Bank and the Organisation of Economic Cooperation and Development lowered 2019-20 growth forecast for India by 50 basis points and 1.3 percentage points to 6.5 per cent and 5.9 per cent respectively.

Rating agency Standard & Poor’s has also lowered its India growth forecast to 6.3 per cent from 7.1 per cent .

“What was an investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation,” it said adding a credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem.

“While we expect a moderate pick-up in real GDP growth and inflation over the next two years supported by monetary and fiscal stimulus, we have revised down our projections for both. We forecast real GDP growth to decline to 5.8 per cent in the current fiscal from 6.8 per cent in 2018-19, and to pick up to 6.6 per cent in 2020-21 and around 7 per cent over the medium term,” it said.

Moody’s expected a 0.4 percentage point slippage in the fiscal deficit target of the government to 3.7 per cent of the GDP in the current fiscal due to the corporate tax cut and lower nominal GDP growth. “A prolonged period of slower nominal GDP growth not only constrains the scope for fiscal consolidation but also keeps the government debt burden higher for longer compared with our previous expectations,” it said.

It, however, saw “low probability” of a significant and rapid deterioration in fiscal strength, India’s main credit constraint, given the resilience to financing shocks offered by the composition of government debt. India’s real GDP growth has declined in each of the past five quarters, falling to 5 per cent year-on-year in April-June 2019 from 8.1 per cent in January-March 2018.

“By international standards, 5 per cent real GDP growth remains relatively high, but it marks a low rate for India. Combined with a marked decrease in inflation in recent years, this has resulted in a material decline in nominal GDP growth from typical annual rates of 11 per cent or higher over the past decade, to around 8 per cent in the second quarter of 2019,” it said.

While private investment has been relatively weak since 2012, consumption – which makes up about 55 per cent of GDP – had remained robust.

“However, private consumption growth has now also fallen quite sharply, to 3.1 per cent in the second quarter from 7.3 per cent in the first. This was the lowest rate of quarterly consumption growth since October-December 2014, and high-frequency consumption demand indicators (such as automobile, truck, two-wheeler and tractor sales) point to continued weakness,” it added.

Fibre2Fashion News Desk (DS)

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