Slowdown blues: SBI cuts FY20 GDP growth forecast to 5%

Our Bureau Mumbai | Updated on November 12, 2019

With IIP contracting alarmingly in Sept, EcoWrap report sees 4.2% growth in Q2

In the backdrop of a deepening global slowdown and an alarming contraction in domestic factory output, State Bank of India’s economic research team has sharply cut India’s GDP forecast for FY2020 to 5 per cent from 6.1 per cent.

In its EcoWrap report, the SBI group has projected the second quarter (July-September) GDP growth at 4.2 per cent. It expects the growth rate to pick up in FY2021 to 6.2 per cent.

“Our acceleration rate for 33 leading indicators, at 85 per cent in October 2018, is down to just 17 per cent in September 2019, with such decline gaining traction from March 2019. Even the IIP (Index of Industrial Production) growth number for September 2019 was –4.3 per cent, which is quite alarming,” said Soumya Kanti Ghosh, Group Chief Economic Adviser.

The team believes the growth rate in FY20 should be seen through the prism of synchronised global slowdown (countries have witnessed 22 to 716 basis point decline between June 2018 and June 2019, and India cannot be an exception). India is also significantly lower in the Economic Uncertainty Index when compared globally.

The SBI research team assessed that Moody’s downgrading India’s outlook from stable to negative will not have any significant impact as rating actions are always a laggard indicator, and the markets have categorically given a thumbs down to such moves.

Larger rate cuts

The research team now expects a larger rate cut from the RBI at its December policy meet. However, even such a rate cut is unlikely to lead to any immediate material revival; rather, it might lead to financial instability as debt-financed consumption by over-leveraged households has not worked elsewhere, and India cannot be an exception.

“The contemporary issue for macro-economists is to focus on assuring adequate aggregate demand, and the role of fiscal policy in this context is of paramount importance. Much of the reluctance about use of fiscal policy in India currently appears from the fact that the monetary policy space is still adequate. This, we believe, could be counter-productive,” said Ghosh.

In essence, markets are not unduly worried about fiscal deficit and are awaiting clarity from the government on the extent of fiscal slippage in the current fiscal. Such an announcement could, in fact, be good for the markets, he added.

Lasting solution for NBCFs

Against such growth slowdown, the team observed that it is imperative that India adheres to no negative policy surprises in sectors such as telecom, power and non-banking finance companies. For example, it is imperative that a lasting solution is worked out for the NBFC sector at the earliest.

The team believes that given the crisis of confidence in the financial markets, the central bank must ensure liquidity for NBFCs for the stability of the financial system.

“With every passing day the risk increases that the not-so-better-rated NBFCs, in their quest to achieve the capital ratio, could do it through deleveraging and reduction of their assets, thus prolonging the credit crunch. It is reminiscent of the back loading of mega bank recapitalisation that was unveiled only in 2017,” said Ghosh.

Needed is a credible frontloading of backstop against good quality assets, which can be used quickly to absorb potential losses for NBFCs if they materialise. Similarly, the woes of the telecom sector must be addressed so that new investors are encouraged to set up networks in the country.

Simultaneously, the SBI team said it is perplexing that a growing economy is witnessing a contraction in electricity demand, with discoms reducing buying for reasons well known.


Published on November 12, 2019

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