Ind-Ra revises India's GDP forecast, cuts it down to 5.6% for FY20

India Ratings and Research, the Indian subsidiary of Fitch group, has revised its GDP forecast for current fiscal to 5.6 per cent. This is the rating agency's fourth revision in GDP forecast so far. India Ratings, or Ind-Ra, had revised the GDP growth forecast to 6.1 per cent just a month ago.

"This revision became inevitable as the high-frequency data now suggests that the agency's estimate of 2QFY20 GDP growth coming in a little higher than 5 per cent is unlikely to hold. The new projection suggests that 2QFY20 GDP growth is likely to be 4.7 per cent. Despite favourable base effect, declining growth momentum suggests that even the 2HFY20 will now be weaker than previously forecasted and is likely to come in at 6.2 per cent," Ind-Ra said in a statement.

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Ind-Ra further stated that even achieving GDP growth of 5.6 per cent will "require heavy lifting by the government". The agency noted that government expenditure bounced back in the September quarter of FY20 after slipping in the June quarter earlier on account of Lok Sabha elections. It, however, warned that sticking to the fiscal deficit target of 3.3 per cent could push GDP growth even below 5.6 per cent.

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Meanwhile, the ratings agency also predicted a decline in current account deficit to reach 1.8 per cent of GDP in FY20 on the back of softer crude oil prices and lower capital goods import and Indian rupee to average 71.06 against the US dollar in FY20.

"Combined capital and consumption expenditure of central and 20 states government in 2QFY20 grew 37.8 per cent and 20.1 per cent respectively, and Ind-Ra expects it to continue in 2HFY20 leading to central government's fiscal deficit coming in at 3.6 per cent of GDP. If the central government adheres to the budgeted fiscal deficit of 3.3 per cent of GDP by cutting/rolling over expenditure, then Ind-Ra believes FY20 GDP growth could be even lower than 5.6 per cent," the ratings agency stated.

Ind-Ra also made note of the ongoing economic slowdown across India. The ratings agency said that the ongoing agrarian distress and dismal income growth so far, coupled with subdued income growth expectation in urban areas have weakened the consumption demand considerably, which even festive demand this year could not remedy.

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"Private final consumption expenditure (PFCE) growth is now expected to grow 4.9 per cent in FY20, significantly lower from 8.1 per cent in FY19, slowest since FY13. Even investment expenditure growth, as measured by gross fixed capital formation (GFCF), is expected to moderate to 6.0 per cent in FY20 from 10.0 per cent in FY19, which will be a five-year low," Ind-Ra stated.

India Ratings expects wholesale and retail inflation to remain benign as relatively weak demand conditions have kept the pricing power of manufacturing sector under check despite rising inflation in the food basket.

"Ind-Ra expects inflation based on the Wholesale Price Index and Consumer Price Index (CPI) to come in at 1.5 per cent and 3.9 per cent, respectively, in FY20. The current growth-inflation dynamics therefore, still provides some more headroom to RBI and Ind-Ra expects another rate cut of 25 basis points in the December 2019 monetary policy review," the agency said.

Considering, RBI's accommodative monetary policy stance, Ind-Ra said that it expects the benchmark 10-year government-security (G-Sec) bond yields to trade in the range of 6.5-6.6 per cent by FYE20. However, a higher government borrowing during 2HFY20 may push interest rates higher, the agency further added.

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