At 5.8%, Moody’s dishes out bleakest FY20 growth forecast for India so far

Moody’s Investor Services

Moody’s Investor Services on Thursday slashed its 2019-20 growth forecast for India to 5.8% from 6.8% earlier, saying the economy was experiencing a pronounced slowdown which is partly related to long-lasting factors. The rating agency’s projection is the most pessimistic so far and comes ahead of International Monetary Fund’s growth projections due next week.

Last month, Asian Development Bank and the Organisation of Economic Co-operation and Development lowered FY20 growth forecast for India by 50 basis points and 1.3 percentage points to 6.5% and 5.9%, respectively. Last week, the Reserve Bank of India also slashed its growth projection for the economy by 80 basis points to 6.1% for 2019-20. Rating agency Standard Poor’s has also pared down its India growth forecast to 6.3% from 7.1% earlier.

Moody’s said a prolonged phase of softer growth in India would dampen prospects for the government’s fiscal consolidation plans and hamper its ability to prevent a rise in the debt burden, thus constraining the country’s sovereign credit profile.

“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% in the fiscal year ending in March 2020 (fiscal 2019) from 6.8% in fiscal 2018, and to pick up to 6.6% in fiscal 2020 and around 7.0% over the medium term. Compared with only two years ago, the probability of sustained real GDP growth at or above 8% has significantly diminished,” it added.

The Indian economy is battling a severe demand slowdown and liquidity crunch which resulted in economic growth rate falling to a six-year low of 5% in the June quarter, while growth in private consumption expenditure slumped to an 18-quarter low of 3.1%.

The rating agency said what began as an investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation. “A credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem,” it added.

Moody’s said prospects for fiscal consolidation look limited, though rapid deterioration is also unlikely. “With the recently announced corporate tax cuts and lower nominal GDP growth, we now expect a central government deficit of 3.7% of GDP in fiscal 2019, marking a 0.4 percentage point slippage from its target. A prolonged period of slower nominal GDP growth not only constrains scope for fiscal consolidation, but also keeps the government debt burden higher for longer compared with our previous expectations,” it added.

News Source:Livemint

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