India Ratings pegs 2020-21 GDP growth at 5.5 per cent

Shishir Sinha New Delhi | Updated on January 22, 2020

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The agency feels downwards risks born out of the fall in lending by NBFCs, reduced income growth of households, and inability of the dispute resolution system to quickly unlock capital will persist into the next financial year

Domestic rating and research agency India Ratings and Research on Wednesday estimated India’s Gross Domestic Product (GDP) would grow at 5.5 per cent in fiscal year 2020-21 (FY21). Though, this is slightly higher than the 5 per cent GDP growth rate projected for the current fiscal year (FY20), the agency feels that the downward risk will persist.

The slowdown, in the agency’s view, is a combination of several factors. It said the prominent ones are an abrupt and significant fall in lending by non-banking financial companies close on the heels of a slowdown in bank lending, reduced income growth of households coupled with a fall in savings and higher leverage, and inability of the dispute resolution/judicial systems to quickly release capital that is stuck.

Although some improvement in FY21 is expected, these risks are going to persist. As a result, the Indian economy is stuck in a phase of low consumption as well as low investment demand. Ind-Ra believes a strong policy push coupled with some heavy lifting by the government (even if this requires using the escape clause as suggested by the FRBM Review Committee headed by NK Singh) is required to revive the domestic demand cycle and catapult the economy back into a high growth phase.

The government has announced a slew of measures recently to prop up the economy, but Ind-Ra believes they will be of help only in the medium term. Therefore, all eyes are on the forthcoming Union Budget, to be presented on February 1. The agency expects the shortfall in tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6 per cent of GDP (budgeted at 3.3 per cent) in FY20, even after accounting for the surplus transferred by the RBI. A continuance of low GDP growth even in FY21 means subdued tax revenue and limited room for stepping-up expenditure.

Expenditure rationalisation

The agency believes the government will have to construct the FY21 budget in a way that expenditure is rationalised and prioritised and all avenues of revenue generation are tapped. While rationalising, the focus of expenditure has to be on creating direct employment and putting more money in the pockets of people at the bottom of the pyramid. Their marginal propensity to consume is close to one — meaning they are likely to spend what they receive. This will support consumption demand. Therefore, budgetary allocation to heads such as rural infrastructure, road construction, affordable housing and MGNREGA must be prioritised. Allocation for non-merit subsidy/expenditure will be less critical for growth be rationalised, it said.

Also, gross fixed capital formation (GFCF) has become government dependent, as incremental private capex has been down and out. Despite the fiscal constraints, the government has not shied away from infrastructure spending in the past and even resorted to fund it through extra-budgetary resources.

Ind-Ra, therefore, believes the government will continue to focus on infrastructure spending and leverage all possible options — the budget, off-budget options, including the National Infrastructure Investment Fund. Also, since a larger part of the government capital expenditure now takes place at the State government level, it will be important to keep a tab on the State’s capex as well.

It may be pointed here that the higher award recommended by the 14th Finance Commission to the States was mostly spent on capex. Ind-Ra thus expects GFCF and government final consumption expenditure to grow at 5.3 per cent and 9 per cent, respectively, in FY21 (FY20: 1 per cent and 10.5 per cent).

Furthermore, Ind-Ra expects private final consumption expenditure (PFCE) to grow at 6 per cent in FY21 (FY20: 5.8 per cent). The key support to PFCE could come from rural demand, which may see an uptick with higher rabi output. Urban demand may not see an uptick but hold due to the expected credit growth of 8-9 per cent (similar to FY20).

Inflation projection

The agency expects retail and wholesale inflation to average 3.9 per cent and 1.3 per cent, respectively, in FY21 (FY20: 4.4 per cent and 1.4 cent). Food and crude oil prices are the key drivers of inflation in India. Though oil prices are stable, retail food inflation, after remaining subdued and in single digits for 70 months since January 2014, entered into double digits in November 2019 and accelerated to 14.12 per cent in December 2019. This means, in the near term, further monetary easing is ruled out and there could be an extended pause on the policy rate. However, the minor improvement in the FY21 fiscal deficit from FY20, coupled with moderate inflation, may keep the 10-year G-sec rate in the 6.8-6.9 per cent range by end-March 2021.

The external environment continues to be challenging for exports due to the trade friction and protectionist policies pursued by many developed economies. As a result, India’s exports of goods and services are likely to witness a contraction of 2 per cent in FY20. With some breakthrough in the US-China trade talks, Ind-Ra expects the external environment to improve somewhat in FY21.

This is likely to help India’s exports of goods and services to grow 7.2 per cent and the current account deficit decline marginally to $32.7 billion, 1.1 per cent of GDP, in FY21 (FY20: $33.9 billion, 1.2 per cent of GDP). In view of these developments, Ind-Ra expects the rupee to average at 73 against the dollar in FY21.

Published on January 22, 2020

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