Weak household consumption to curb growth: Moody’s

Shishir Sinha New Delhi | Updated on December 16, 2019

Recent stimulus measures to have a limited impact, says the rating agency

The pain of a lower growth rate is unlikely to recede soon with global rating agency Moody’s on Monday saying that weak household consumption will curb growth. It also apprehends that the effects of recent policy stimulus will be limited and slower growth will dim prospects for significant fiscal consolidation.

These remarks have come at a time when the Modi Government 2.0 is in the midst of preparations for its second general budget and all the economic indicators are giving weak signals. The GDP (Gross Domestic Products) growth rate has slowed down to 4.5 per cent during the July-September quarter. Industrial growth (-3.8 per cent in October) has decelerated for the third successive month in October, while the rate of retail inflation (5.54 per cent for November) is at the higher end of the targeted rate band of 2-6 per cent (4 per cent with two per cent swing in both directions). Some economists feel that the Indian economy is in the ‘stagflation’ (lower growth rate, high inflation and high unemployment rate) zone.

In its in-depth sector report on consumer trends in India, the agency said the country’s growth has decelerated in recent quarters, driven by a combination of cyclical and structural factors. The deceleration began as an investment-led slowdown, and has now broadened into consumption, with financial stress among rural households and weak job creation among the key drivers of the weaker conditions.

A credit crunch among NBFIs, which have been major providers of retail loans in recent years, has exacerbated the slowdown. “While household consumption has been the bulwark of growth, making up about 57 per cent of GDP in the fiscal year ended in March 2019 (FY2018/19), recent consumption trends point to a weaker pace of economic expansion compared with the recent past. We have lowered our GDP growth forecast for FY2019/20 to 4.9 per cent from 5.8 per cent, and cut our forecast for FY2020/21 to 6.3 per cent from 6.6 per cent,” it said.

The Government and the Reserve Bank of India have taken a number of measures to arrest the slowdown. While the Government has taken steps such as income support to the farmers and corporate tax reduction, the RBI has lowered the policy interest rate by 135 basis points (100 basis points is one percentage point). “We expect the transmission of lower repo rates to the lending rates to be limited. Between February and September 2019, the RBI reduced the policy repo rate by 110 basis points cumulatively, and by another 25 basis points for the fifth time at its policy meeting in October 2019. However, the response of commercial bank lending rates has been muted, reflecting banks’ weak balance sheets and low capacity to take on troubled loans,” the agency said. Further, it said while the weighted average lending rate on fresh rupee loans decreased by only 29 basis points from February to September 2019, the rate on outstanding rupee loans has increased by seven basis points over the same period.

The agency expects credit growth to slow down in the coming quarters and provide less of an impulse to economic growth. Against a backdrop of slower growth, weakening asset quality is likely to drive lenders to tighten underwriting standards. Further, non-bank financial companies (NBFCs), which account for a material share of retail credit, will continue to prioritise conserving liquidity over balance sheet growth.

A 2012 RBI study illustrates the pro-cyclicality of Indian credit between 2000 and 2011. When the Indian economy starts to overheat (GDP growth starts to slow), the credit intensity continues to rise. When the economy starts to bottom out (GDP growth starts to pick up), credit intensity slows, thereby, providing less impulse on growth. “We have extended the series and find that credit remains highly pro-cyclical in India even in recent years,” it said.

Talking about reduction of the corporate rate, it said such a move will help attract foreign direct investment in the medium term, particularly in the manufacturing space, and create jobs. In the short term, the immediate savings that will accrue to companies could be used to pay down debt, as shareholder dividends or operational expansion (such as employment and investment). India's industrial production has contracted in recent months and capacity utilisation in manufacturing slipped in the third quarter of 2019. Slack in manufacturing suggests that companies are unlikely to increase their production capacity or create more jobs in the near term. More broadly, demand conditions are unlikely to pick up significantly anytime soon as the income and employment scenario remains grim.

Published on December 16, 2019

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