Workers assemble a car at the Tata Motors factory in Pune in the Indian state of Maharashtra. Photo: AFP

With the Indian economy battling a slowdown in demand and a liquidity crunch, numerous rating agencies and even the country’s central bank have painted a cooler picture of the economy for the 2019-20 fiscal year.

The latest to do this is Moody’s Investor Services, which has trimmed India’s growth forecast to 5.8% from 6.2%. It said the economy is experiencing a pronounced slowdown which is partly related to long-lasting factors. The agency’s projection is the most pessimistic so far and comes ahead of growth predictions by the International Monetary Fund that are due next week.

Moody’s said a prolonged phase of softer growth in India will weaken the government’s plan for fiscal consolidation 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,” the rating agency stated.

As for the fiscal deficit, Moody’s expected a 0.4 percentage point slippage in the government’s fiscal deficit target to 3.7% of GDP in the current fiscal year due to the corporate tax cut and lower nominal GDP growth.

Debt burden

Moody’s sees limited prospects for fiscal consolidation, but also rules out rapid deterioration. “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 added.

The ratings agency pointed out that private consumption growth has now fallen quite sharply, to 3.1% in the second quarter from 7.3% 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 said.

A credit crunch among shadow bankers, the major providers of retail loans in recent years, has compounded the problem.

Last week, the Reserve Bank of India also slashed the county’s economic growth projection by 80 basis points to 6.1% for 2019-20. Ratings agency Standard Poor’s has also pared down its India growth forecast to 6.3% from 7.1% earlier.

Last month, the Asian Development Bank and the Organisation of Economic Co-operation and Development lowered their forecasts for FY20 growth in India by 50 basis points and 1.3 percentage points to 6.5% and 5.9%, respectively.

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