GDP forecast revision . Buoyed by stimulus, Moody’s lowers contraction to -10.6%

Moody’s Investors Service on Thursday revised its India’s GDP forecast for FY 2020-21 and FY 2021-22. It lowered GDP contraction forecast for India to (-) 10.6 per cent from (-) 11.5 per cent for current fiscal. It also revised growth forecast for India during FY 2021-22 to 10.8 per cent from 10.6 per cent projected earlier.

The agency highlighted latest stimulus prioritises manufacturing and job creation, and shifts focus to longer-term growth. Last week, the government announced a new fiscal package amounting to around ₹2.65 lakh crore, which included production-linked incentive scheme for manufacturing units and enhanced credit guarantee programme for small businesses. Moody’s said the latest measures aim to increase the competitiveness of India’s manufacturing sector and create jobs, while supporting infrastructure investment and is “credit positive” as it presents potential upside to growth forecasts.

The agency said adding that in the medium term the growth is likely to settle around 6 per cent. “The country’s mixed track record on revenue-raising measures lowers prospects for fiscal policy-driven budget consolidation. A sustained increase in GDP growth would therefore likely be a major driver of any durable future fiscal consolidation,” it said.

Government debt

Moody’s forecasts government debt to increase to 89.3 per cent of GDP in fiscal 2020 and decline to 87.5 per cent in fiscal 2021, from 72.2 per cent in fiscal 2019. According to the agency, fiscal deficit would reach around 12 per cent of GDP, with some upside risk, in fiscal 2020 and narrowing to about 7 per cent of GDP over the medium term, still above the deficit of 6.5 per cent of GDP in 2019.

Low consumer confidence

Moody’s, however, said that consumer confidence in India remains relatively low amid a continued elevated number of daily new coronavirus cases, although this has come down from a peak in September. “Stronger nominal GDP growth over the medium term would make it easier for India’s government to address its weak fiscal position, which the coronavirus has exacerbated,” it said.

The government had last week provided incentives for new job creation, additional fertiliser subsidy, announced tax relief on select home sale deals, and expanded support for infrastructure investment, totalling to ₹2.65 lakh crore. “The scheme aims to increase the competitiveness of India’s manufacturing sector, potentially reviving private investment, where year-on-year growth has been trending downward since the second quarter of 2018,” Moody’s said.

The government expects that the companies currently approved under the scheme will generate total production of more than ₹10.5 lakh crore (5.5 per cent of GDP) over the next five years, of which 60 per cent would be exports. “As countries have increasingly looked to greater diversification in their supply chains since the coronavirus pandemic, the timely introduction of these measures could boost India’s manufacturing industry, which contributed around 15 per cent of GDP in 2019,” Moody’s said.

The latest stimulus package also targets job creation with a new wage subsidy scheme lasting until the end of June 2021. “The wage support provided to businesses and the push to scale up production under the PLI scheme could increase employment in India’s persistently soft labour market,” it added.

COMMENT NOW