International rating agency Moody's on Thursday announced the lowering of India's Gross Domestic Products (GDP) growth to 5.8 per cent. This is lowest projection after the Reserve Bank of India cut the GDP growth to 6.1 per cent earlier this month.
"We forecast real GDP growth to decline to 5.8 per cent, in the fiscal year ending in March 2020, from 6.8 per cent in fiscal 2018, and to pick up to 6.6 per cent in fiscal 2020, and around 7.0 per cent over the medium term," the agency said.
It said that India's growth will remain weaker than in the recent past at 5 per cent year-on-year in the April-June quarter of 2019.
India's real GDP growth has slowed markedly.
Reasons for slowdown
The drivers of the deceleration are multiple, mainly domestic factors and in part, long-lasting. What was 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) -- who have been major providers of retail loans in recent years -- has compounded the problem. Compared with only two years ago, the probability of sustained real GDP growth at or above 8 per cent has significantly diminished.
While Moody's expects a moderate pickup in real GDP growth and inflation over the next two years through monetary and fiscal stimulus, it has revised down the nation's projections for both years.
India's fiscal strength
With the recently announced corporate tax cuts and lower nominal GDP growth, the agency now expects a central government deficit of 3.7 per cent 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's debt burden higher for a longer period of time, compared with its previous expectations.
Based on its debt sensitivity analysis, under nominal growth of around 11 per cent close to its baseline assumption, the debt burden will remain broadly stable at around 68 per cent of GDP, and decline slightly toward 66 per cent by 2023.
The agency continues to see low probability of a significant and rapid deterioration in fiscal strength, India's main credit constraint, given the resilience to financing shocks offered by the composition of government debt.
The government's tax cuts, combined with lower nominal GDP growth, have dampened the outlook for fiscal consolidation and increased the risk that the debt burden, which is currently relatively high, may not stabilise, let alone decline.
This denotes a weaker medium-term fiscal outlook than what it had previously expected.
A large pool of domestic private savings, available to finance government debt, mitigates India’s fiscal risks. High savings have enabled the government to issue long-maturity debt, over 90 per cent of which is owed to domestic institutions and denominated in rupees.
As a result, despite its large fiscal deficits, India’s gross financing requirements are moderate and relatively insulated from external financing and exchange rate risk. The longer maturity profile of government debt, averaging close to 10 years, also lowers the impact of interest rate volatility on debt servicing costs.
Revenue and expenditure
The Indian government has estimated that the corporate tax cut will reduce revenue by around Rs 1.5 trillion ($21 billion, about 0.7 per cent of GDP) in fiscal 2019*. After factoring in exclusions for tax exemptions and the recent 0.3 per cent of GDP transfer of capital from the RBI, Moody's expects a central government fiscal deficit of about 3.7 per cent of GDP in fiscal 2019, resulting in a slippage of 0.4 percentage points of GDP from the government's target.
A structural need for spending on public sector salaries, welfare schemes and infrastructure is a major cause of India's deficit. So too is the nation's limited tax revenue base, due to a large low-income population, with per-capita GDP of $7,874 in purchasing power parity (PPP) terms in 2018.
Meanwhile, at around 23 per cent of revenue, interest payments are much higher than the 8 per cent median for rating peers. Greater reliance on state-owned enterprises to meet the country's need for social and physical infrastructure raises contingent liability risks for the sovereign.
For these structural reasons, the agency has assessed that the outlook for the debt burden is significantly dependent on trends in nominal GDP growth. India’s historically high rate of nominal GDP growth was an important driver of a declining debt burden in the past, from above 80 per cent of GDP in the early 2000s to about 67 per cent in 2010.
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