Slower growth, but economic revival hopeful
Although India Ratings and Research (Ind-Ra) welcomes the recent measures announced by the government to arrest the economic slowdown, it believes they are likely to support growth only in the medium-to-long term. Also, as most of the measures announced endeavour to reduce the cost of goods and services, they are essentially a supply-side response to revive growth. The agency believes the bigger challenge facing the economy is from the demand side as consumption demand has collapsed and private corporate investment is not forthcoming. Therefore, Ind-Ra believes the need is to take measures that will enhance the disposable income/put additional money in the hands of rural/urban households. Additionally, the Government also needs to step up its spend on rural infrastructure activities such as rural roads/rural housing, Mahatma Gandhi National Employment Guarantee Scheme, etc. to generate large-scale employment that could add/stimulate consumption demand.
Ind-Ra has revised its FY20 gross domestic product (GDP) growth down to 6.1 per cent following Central Statistical Organisation (CSO) estimating 1QFY20 GDP growth to be 5.0 per cent, much lower than Ind-Ra’s estimate of 5.7 per cent. This is Ind-Ra’s second downward revision; the agency revised its GDP growth estimate to 6.7 per cent from its earlier forecast of 7.3 per cent as recently as in August 2019. Although Ind-Ra had cited a slowdown in both urban and rural consumption demand growth as one of the key reasons for the downward revision of GDP in its August 2019 forecast, CSO’s 1QFY20 estimate shows that the slowdown has been much sharper than Ind-Ra’s expectation. It crumbled to 3.1 per cent in 1QFY20 as compared to 7.2 per cent a quarter ago and 7.3 per cent a year ago. The GDP growth in 1HFY20 is likely to be 5.2 per cent. Ind-Ra expects it to recover to 6.9 per cent in 2HFY20, mainly on account of the base effect.
The slowdown in consumption demand is reflected in the Reserve Bank of India’s (RBI) Consumer Confidence Index as well that declined to 89.4 in September 2019 (July 2019: 95.7). The other key indicators that have worsened lately are – (i) aggregate capacity utilisation declining to 73.6 per cent in 1QFY20 (4Q4FY19: 76.1 per cent), (ii) banking credit to commercial sector turning negative at Rs 1,287 billion in 1HFY20 (1HFY19: Rs 1,850 billion) and (iii) non-banking credit to commercial sector falling to Rs 2,197 billion in 1HFY20 (Rs 5,510 billion).
Due to delayed and uneven monsoon, Ind-Ra expects agricultural gross value added (GVA) to grow at 2.0 per cent in FY20, lower than FY19’s 2.9 per cent. However, higher reservoir level and soil moisture due to late rainfall has brightened the outlook of rabi production. Overall GVA is likely to grow at a six-year low of 6.0 per cent in FY20 (FY19: 6.6 per cent), driven by services (7.5 per cent) and industry (5.1 per cent).
The key drivers of inflation in India—food and crude oil prices—are currently benign and likely to remain so during the remainder FY20. RBI has cut the policy rate by 135 basis points since February 2019. Ind-Ra expects inflation based on Wholesale Price Index and Consumer Price Index to remain moderate at 3.0 per cent and 3.7 per cent, respectively, in FY20 (FY19: 4.3 per cent and 3.4 per cent). The agency, therefore, believes there is still a window for another 50 basis points rate cut in the near term. As a result, the 10-year government security bond yield is expected to trade in the range of 6.5 to 6.6 per cent by FYE20.
FY20 fiscal deficit has been budgeted at 3.3 per cent of GDP. In Ind-Ra’s assessment, tax revenue in FY20 may fall short by around Rs 1,500 billion from the budgeted figure, similar to the tax revenue shortfall observed in FY19. Although the increased transfer from the RBI after the acceptance of Bimal Jalan Committee report on Economic Capital Framework will provide some cushion, the announcement of reduction in corporate tax rate will stretch the government finances. Ind-Ra’s calculations show that the fiscal deficit could increase to 3.6 per cent of GDP in FY20.
The agency expects current account deficit to decline to 1.8 per cent of GDP in FY20 from 2.1 per cent of GDP in FY19, aided by softer crude oil prices. Even capital account is expected to record a surplus of $70.0 billion supported by foreign direct investments, foreign portfolio investments and banking capital inflows. In view of these developments, Ind-Ra expects the Indian rupee to average 70.86 against the dollar in FY20.