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All is not well with the Indian economy, say analysts; remain cautious

Growth rates in India have been grinding lower over the past few quarters, with the Reserve Bank of India (RBI), too, now sitting up and taking note of the problem. While reviewing the monetary policy on Thursday, the central bank lowered the forecast to 5 per cent for financial year 2019–20 (FY20), down from 6.1 per cent in the October 2019 policy review and 2 per cent lower than the June 2019 projection.

Recently, analysts at CLSA too had forecast a similar growth rate (of 5 per cent) for the Indian economy in FY20 with risks to the downside. Their worst-case scenario for FY20 is 50 basis point (bps) lower than this projection at 4.5 per cent.

“India is in the middle of a severe credit contraction that started with the liquidity squeeze triggered by the crisis in the non-bank finance companies (NBFCs), which has now spread to deposit-taking companies as well. India is growing below historical trend and there will be some pressure on broad consumption aggregates. Modi’s corporate tax cuts are bold but will take time to gain traction. India’s recovery will be postponed to late 2020,” said Eric Fishwick, chief economist at CLSA. READ ABOUT IT HERE

Meanwhile, the RBI has revised the consumer price inflation (CPI) projection upwards to 5.1 – 4.7 per cent for the second half of the financial year 2019-20 and 4 – 3.8 per cent for first half of 2020-21. A few days ago, the gross domestic product (GDP) print for the second quarter of the current fiscal came in at 4.5 per cent – the weakest in six years.

With most sectors are currently facing macro headwinds, broad macro parameters (investment, domestic and global) are all at/near to the lowest levels since FY14, reports indicate. There is a dip in both consumer and business confidence. Index of industrial production (IIP), core sector growth and rural employment numbers are nothing to write home about.

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“Under the current environment when both business and consumer sentiments are down, a rate cut alone will not spur consumption and/or investment demand. Therefore, allowing various measures announced by the government as also the policy rate cut of 135 basis points during February-October 2019 to play out perhaps is the way forward rather than reducing the headroom available for policy rate cut,” says Dr. Sunil Kumar Sinha, director for public finance and principal economist at India Ratings & Research.

In this backdrop, most experts remain cautious on the road ahead for the economy and expect a pick-up only in the second half of 2020. Analysts at Nomura, for instance, expect the GDP to remain sub-par until mid-2020 with an improvement only in the third quarter of 2020 (Q3-2020). 

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“The current risks prolonging the balance sheet deleveraging cycle, postponing the private investment cycle recovery will further hurt India’s potential growth. Expect growth to continue to disappoint both in FY20 and FY21,” wrote Sonal Varma, managing director and chief India economist at Nomura in a recent co-authored report with Aurodeep Nandi. Their estimate for GDP growth in FY20 stands at 4.9 per cent and at 6.1 per cent in FY21.

Risks of delayed revival in domestic demand and further slowdown in global economic activity (as highlighted by RBI) has led to a downward revision in CARE Ratings’ GDP forecast from 5.5 per cent to 5.2 per cent in FY20. They also believe inflation to remain elevated during November – December and could ease thereafter. By March, 2020 it would be around 4 – 4.5 per cent, which is within the flexible inflation target band of 4 per cent (+/- 2 per cent).


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