India Ratings & Research (Ind-Ra), a Fitch Group company, presented its estimate of GDP (Gross Domestic Products) growth on Wednesday saying that it can slip to 6.7 per cent during current fiscal year 2019-20 (FY20).

This projection is 60 basis points (100 basis points mean one percentage point) lower than earlier estimate of 7.3 per cent and 10 per cent lower than 6.8 per cent registered during last fiscal 2018-19.

The agency also said that growth rate during first three months of current fiscal (Q1 or April-June) could be 5.7 per cent which is 10 basis points less than 5.8 per cent during fourth quarter of previous fiscal year.

Ind-Ra expects FY20 to be the third consecutive year of subdued growth pushed by (i) a slowdown in consumption demand; (ii) delayed and uneven progress of monsoon so far; (iii) decline in manufacturing growth; (iv) inability of Insolvency and Bankruptcy Code to resolve cases in a time-bound manner, and (v) rising global trade tension adversely impacting exports. Even on a quarterly basis, 1st Quarter of FY20 is expected to be the fifth consecutive quarter of declining GDP growth as Ind-Ra expects it to come in at 5.7%.

Stimulus package

On August 23, 2019, Finance Minister Nirmala Sitaraman announced a stimulus packageto revive the economy, which included addressing some of the issues facing auto sector, MSME, banking sector, capital market. However, these measures are likely to support growth only in the medium term, but the agency expects GDP growth to recover to 7.4% in the 2H FY20, mainly on account of the base effect.

Private consumption, which has been the mainstay of aggregate demand, has in fact come under pressure in urban as well as rural areas lately. While the reduced income growth of households has taken the sting out of the urban consumption, drought/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption.

Private corporate investment

Even investment, particularly private corporate investment, has remained sluggish over the past few years. However, average investment growth, largely constituting government and corporate sector maintenance capex, at 9.2% during FY17-FY19 looks healthy vis-à-vis the average investment growth of 3.6% during FY14-FY16. Incremental or greenfield private corporate capex, although, is still missing.

Household expenditure

Since the major contributors to the economy’s investment pie are households (which include unorganised and unregistered enterprises, 38.6%) and private corporations (37.9%), their spending hold the key for reviving broad-based investment activity in the economy. While households’ major investment is in real estate, that of private corporation is in machinery and equipment. Given the stress in the real estate sector and manufacturing sector capacity utilisation hovering in 70%-76% range since FY14, Ind-Ra believes revival of private investment demand will be a long drawn process.

Other growth drivers

Of the other two demand-side growth drivers, government expenditure continues to be steady and is expected to grow at 10.6% in FY20 (FY19: 9.2%) while exports is facing headwinds due to rising trade tensions/weakening global GDP growth and is expected to grow at a subdued 7.2% in FY20.

Due to delayed and uneven monsoon, Ind-Ra expects agricultural gross value added (GVA) to grow at 2.1% in FY20, lower than FY19’s 2.9%. Overall GVA is expected to grow at a six-year low of 6.5% in FY20 (FY19: 6.6%), driven by services (7.9%) and industry (6.1%).

Inflation, WPI, CPI

Food and crude oil prices, key drivers of inflation in India, are currently benign and likely to remain so during the remainder FY20. Ind-Ra expects inflation based on Wholesale Price Index and Consumer Price Index to remain moderate at 3.2% and 3.8%, respectively, in FY20 (FY19: 4.3% and 3.4%). This, the agency believes, will provide headroom to the Reserve Bank of India (RBI) to continue with its accommodative policy stance, thereby resulting in scope for more rate cuts in the near term (notwithstanding the 110 basis points rate cut so far in 2019). As a result, the 10-year G-Sec bond yield is expected to trade in the range of 6.1%-6.2% by FYE20.

FY20 fiscal deficit has been budgeted at 3.3% of GDP. In Ind-Ra’s assessment, tax revenue in FY20 may fall short by around INR1,500 billion from the budgeted figure, similar to the tax revenue shortfall observed in FY19. However, in view of RBI deciding to transfer INR1,760.51 billion (INR1,234.14 billion surplus for FY19 and INR562.37 billion of excess provision) to the government, achieving FY20 fiscal deficit target will not be difficult.

Ind-Ra expects current account deficit to decline to 1.9% of GDP in FY20 from 2.1% of GDP in FY19, aided by softer crude oil prices. Even capital account is expected to record a surplus of USD72.0 billion supported by foreign direct investments, foreign portfolio investments and banking capital inflows.

In view of these developments, Ind-Ra expects the Indian rupee to average 71.21 against the dollar in FY20.

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