Amidst indications of the deadly coronavirus hitting global growth, international rating agency Moody’s Investors Service on Monday lowered the estimate for India’s economic growth rate for 2020 by 120 basis points (100 basis points make up one percentage point).

In its February update titled ‘Global Macro Outlook 2020-21’, the agency said that India’s economic recovery will likely be shallow. It said that India’s economy has decelerated rapidly over the last two years. Real GDP grew at a meagre 4.5 per cent in the third quarter (October-December) of 2019-20. Improvements in the latest high-frequency indicators such as Purchasing Managers’ Index (PMI) data suggest that the economy may have stabilised. While the economy may well begin to recover in the current quarter, we expect any recovery to be slower than we had previously expected, Moody’s said.

“Accordingly, we have revised our growth forecasts to 5.4 per cent for 2020 and 5.8 per cent for 2021, down from our previous projections of 6.6 per cent and 6.7 per cent, respectively,” it said.

This revision has come at a time when the government thinks at least seven green-shoots are visible. These include higher foreign direct investment (FDI), higher foreign portfolio investment, stock market indices ruling at near-life-time highs and strong recovery seen in PMI. However, a day after this claim, industrial growth contracted and retail inflation again surged to a 68-month high.

The agency said that a key to stronger economic momentum would be the revival of domestic demand, both rural and urban. But equally important is the resumption of credit growth in the economy. As data from the Reserve Bank of India (RBI) show, credit impulse in the economy deteriorated throughout last year as a result of the drying up of lending from non-banking financial institutions as well as from banks. Banks have been both unwilling to lend and to lower lending rates, despite successive interest rate cuts by the central bank.

As a result, non-food bank credit growth decelerated to 7 per cent in nominal terms in December 2019, down sharply from 12.8 per cent a year earlier. The deterioration in credit growth to the commercial sector is particularly stark. Nominal credit to industry grew at only 1.6 per cent year-on-year in December 2019, while credit to the services sector registered 6.2 per cent nominal growth, and credit to agriculture and related activities grew 5.3 per cent, the agency said in its update.

The agency further said that with a weak economy and depressed credit growth reinforcing each other, it is difficult to envision a quick turnaround of either, even if economic deceleration may have troughed. On the fiscal front, Union Budget 2020 did not contain a significant stimulus to address the demand slump. As similar policies in other countries have shown, tax cuts are unlikely to translate into higher consumer and business spending when risk aversion is high. Though it expects additional easing by the RBI, “if the recent rise in CPI inflation, mainly as a result of higher food prices, is seen to have second-round effects, this would make it more challenging for the central bank to cut interest rates further,” it cautioned.

Global growth

On the global prospects, the agency said that the Coronavirus outbreak has diminished optimism on prospects of an incipient stabilisation of global growth this year. With the virus continuing to spread, it is still too early to make a final assessment of the impact on China and the global economy. “We have revised our global GDP growth forecast down, and we now expect G-20 economies to collectively grow 2.4 per cent in 2020, a softer rate than last year, followed by a pick-up to 2.8 per cent in 2021,” it said.

It also lowered the growth forecast for China to 5.2 per cent in 2020 and maintained its expectation of 5.7 per cent growth in 2021. It revised downwards the real GDP growth forecast for Australia, Korea and Japan on account of coronavirus.

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