Moody's cuts India growth projection to 5.4% for 2020 from 6.6% projected earlier; cites slower than expected economic recovery

  • In its update on Global Macro Outlook, Moody's said India's economy has decelerated rapidly over the last two years and expects economic recovery to begin in the current quarter

  • The growth projections are based on calendar year and as per its estimates, India has clocked a GDP growth of 5 percent in 2019

  • On the fiscal front, Moody's said, the Union Budget 2020 did not contain a significant stimulus to address the demand slump

New Delhi: Moody's on Monday slashed India's growth forecast for 2020 to 5.4 percent from 6.6 percent projected earlier, on slower than expected economic recovery.

In its update on Global Macro Outlook, Moody's Investors Service said India's economy has decelerated rapidly over the last 2 years and economic recovery is likely to be 'shallow'.

"While the economy may well begin to recover in the current quarter, we expect any recovery to be slower than we had previously expected. Accordingly, we have revised our growth forecasts to 5.4 percent for 2020 and 5.8 percent for 2021, down from our previous projections of 6.6 percent and 6.7 percent respectively," Moody's said.

Moody's growth projections are based on calendar year and as per its estimates, India's GDP grew 5 percent in 2019.

The rating agency had in November 2019 projected economic growth in 2020 and 2021 at 6.6 percent and 6.7 percent respectively. In its latest update, Moody's said the reduction in India's growth rate reflects domestic challenges rather than external factors.

 Moodys cuts India growth projection to 5.4% for 2020 from 6.6% projected earlier; cites slower than expected economic recovery

Representational image. Reuters.

Stating that the key to stronger economic momentum would be the revival of domestic demand and bank credit growth, Moody's said the Union Budget 2020 did not contain a significant stimulus to address the demand slump.

With a weak economy and depressed credit growth reinforcing each other, Moody's said "it is difficult to envision a quick turnaround of either, even if economic deceleration may have troughed".

"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," Moody's said.

The rating agency said it expects additional easing by the Reserve Bank. However, 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 added.

The RBI has lowered the repo rate by a cumulative 135 bps in 2019.

Inflation as measured by the Consumer Price Index (CPI) rose to a 68-month-high of 7.59 percent in January. RBI's mandated target range for retail inflation is 2-6 percent and the central bank aims to keep it at 4 percent over the medium term.

Moody's said that resumption of credit growth is equally important as reviving demand, and banks have been reluctant to lend or lower lending rates despite successive rate cuts by the RBI,

"...credit impulse in the economy has deteriorated throughout the last year as a result of the drying up of lending from non-bank financial institutions as well as from banks," Moody's said.

It said the deterioration in credit growth to the commercial sector is particularly 'stark'.

Nominal credit to industry grew at only 1.6 percent year-on-year in December 2019, while credit to the services sector registered 6.2 percent nominal growth, and credit to agriculture and related activities grew 5.3 percent, it added.

With regard to global growth, Moody's said coronavirus outbreak has diminished optimism about prospects of an incipient stabilization of global growth this year.

Global GDP growth forecast has been revised down, and Moody's now expects G-20 economies to collectively grow 2.4 percent in 2020, a softer rate than last year, followed by a pick up to 2.8 percent  in 2021.

"We have reduced our growth forecast for China to 5.2 percent in 2020 and maintain our expectation of 5.7 percent growth in 2021," it added.

Moody's expects that the spread of coronavirus will be contained by the end of March, and normal economic activity would resume in April-June quarter.

"At present, China's economy is by far the worst affected. However, the rest of the world also has exposure as a result of a hit to global tourism in the first half of this year and short-term disruptions to supply chains," it said.

"The effects on the global economy could compound if the rate of infection does not abate and the death toll continues to rise, because supply chain disruptions in manufacturing would become more acute the longer it takes to restore normalcy," Moody's added.

The death toll from China's coronavirus epidemic rose to over 1,660, with over 68,500 confirmed cases.

The coronavirus outbreak originated in central China's Hubei province in December last year and has spread to several countries.

Many countries have banned arrivals from China, while major airlines have suspended flights to the country.

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Updated Date: Feb 17, 2020 17:21:28 IST