Fitch Ratings on Friday slashed India’s GDP growth forecast for the next fiscal to 6.8 per cent from 7 per cent estimated earlier on weaker than expected economic momentum.
In its latest Global Economic Outlook, Fitch also slashed GDP growth forecast for current fiscal ending March 2019 to 6.9 per cent from 7.2 per cent projected in December. The 6.9 per cent estimate is lower than 7 per cent growth estimated by the Central Statistics Office (CSO) for the current fiscal. Indian economy grew 7.2 per cent in 2017-18 fiscal.
“India’s GDP growth softened for the second consecutive quarter in Q4 of 2018, with the economy growing by 6.6 per cent year-on-year after increases of 7 per cent and 8 per cent in Q3 of 2018 and Q2 of 2018, respectively. The slowdown has been driven by cooling activity growth in the manufacturing sector and, to a lesser extent, agriculture,” Fitch said.
Fitch said weaker momentum has been mainly domestically driven. “First, credit availability has tightened up in areas heavily dependent on non-bank financial company (NBFC) credit, such as autos and two-wheelers, where sales have dropped. Second, food inflation has been muted and fell into negative territory late last year, weighing on farmers’ incomes,” the rating agency said.
“While we have cut our growth forecasts for the next fiscal year (FY20, ending in March 2020) on weaker-than-expected momentum, we still see Indian GDP growth to hold up reasonably well, at 6.8 per cent, followed by 7.1 per cent in FY21. Banks have been increasing credit to the private sector in recent months, filling the void left by the NBFCs,” it said. It said further capital injections and a looser regulatory stance of the Reserve Bank of India (RBI) have eased (though not removed) the state banks’ capital constraints, while the central bank has raised the limit on collateral-free loans that banks can make to farmers (by 60 per cent), helping prevent a decline in bank lending.
According to Fitch, the RBI has adopted a more dovish monetary policy stance and cut interest rates by 25 bps at its February 2019 meeting, a move supported by steadily decelerating headline inflation. “We have changed our rate outlook and we now expect another 25 bps cut in 2019, amid protracted below target inflation and easier global monetary conditions than previously envisaged. On the fiscal side, the budget for FY20 plans to increase cash transfers for farmers. Our benign oil price outlook and our expectations of accelerating food prices in the coming months should support rural households’ income and consumption,” it said.
Fitch said global growth prospects have deteriorated significantly since the last Global Economic Outlook (GEO) in December 2018. “The eurozone growth outlook has weakened particularly sharply, evidence of a slowdown in China has become much clearer and activity in other emerging markets (EM) has decelerated, led by abrupt macroeconomic adjustments in Turkey and Argentina in the aftermath of last summer’s currency crises,” it said.
The US economy is still growing above trend, low unemployment and solid household income growth are supporting consumer spending, and fiscal policy is being eased, Fitch said.