India Ratings and Research (Ind-Ra) has cut its FY20 gross domestic product (GDP) growth estimate marginally by 0.2%, down to 7.3% from its previous forecast of 7.5%.
The key reasons for the downward revision are:-
(i) the prediction of lower-than-normal monsoon for 2019 and the continued agrarian distress.
(ii) the loss of momentum in the industrial output growth, especially manufacturing and electricity.
(iii) the slow progress on cases referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, that has led to the resolution of the non-performing assets of the banking sector becoming a long-drawn-out process.
The inefficiency to bring the stuck capital back into the production process would have several implications for investment recovery, believes Ind-Ra. Investment expenditure growth, as measured by gross fixed capital formation (GFCF), has, therefore, been downwardly revised to 9.2% for FY20 (FY19: 10.0%) from the earlier forecast of 10.3%. Though the average 9.5% investment growth during FY17-FY19 is quite good, the average 3.6% GFCF growth over FY14-FY16 and the current investment recovery is heavily dependent on government capex spending as incremental private corporate capex has shown no recovery signs.
However, consumption demand, as measured by private final consumption expenditure, is likely to grow 8.1% in FY20 (FY19: 8.3%), supported by moderate inflation and favourable demographics. The agrarian distress and consumption demand is likely to be more pronounced in urban areas. However, schemes based on the concept of universal basic income may provide a boost to rural consumption in 2HFY20. Also, one-time support to consumption demand in FY20 may come from election-related expenditure.
Unlike the export-led growth of China, India’s growth has primarily been driven by domestic demand. Yet, exports have played an important role in driving India’s GDP growth over the past one and half decades. There have been trade frictions arising due to US actions/counteractions by affected countries and a possible slowdown in the global GDP growth could keep the external environment challenging in 2019.
The share of exports (goods and services) in India’s GDP increased to 25.4% in FY14 from 12.8% in FY01 but declined thereafter to 19.7% in FY19. Considering the export growth is likely to stay in the low double-digit range, Ind-Ra expects the share of exports in India’s GDP to rise to 20.7% in FY20.
Given the Indian Meteorological Department expects the monsoon to be near normal (96%, error ± 5%) and private weather forecaster Skymet Weather Services Private Limited expects the monsoon to be below normal (93%, error ± 5%) in 2019, Ind-Ra estimates agricultural gross value added growth at 2.5% (earlier forecast 3.0%) for FY20 compared with the 2.7% recorded for FY19. The key support to the gross value added growth in FY20 is likely to come from services (8.3%), followed by industry (7.0%).
Due to the general elections in April-May 2019, the union government presented an interim budget that pegged the fiscal deficit for FY19 and FY20 at 3.4% of GDP. With regard to the FY20 budget, more clarity would emerge only when the full budget would be presented by the new government in July 2019. However, Ind-Ra believes that even the new government is likely to continue and rework on the same fiscal consolidation steps taken so far by the current government.
