India’s growth rate is expected to be marginally higher at 5.5 per cent in 2020-21 against the estimated 5 per cent in 2019-20, but downside risks persist, an India Ratings and Research (Ind-Ra) report released Wednesday said.
It said the present economic slowdown is a combination of several factors, including an abrupt and significant fall in lending by non-banking financial companies close on the heels of a slowdown in bank lending and reduced income growth of households, coupled with a fall in savings and expansion in household leverage.
“Although some improvement in FY2020-21 is expected, these risks are going to persist. As a result, the Indian economy is stuck in a phase of low consumption as well as low investment demand,” said Sunil Kumar Sinha, principal economist and director—public finance, Ind-Ra.
He said of the four engines of growth on the demand side, only one-and-a-half engines are working, including Government Final Consumption Expenditure (GFCE) and partly Gross Fixed Capital Formation (GFCF). The other two engines, Private Final Consumption Expenditure (PFCE) and net exports, are not supporting growth. As GFCF has become government-dependent, the Centre will continue to focus on infrastructure spending and leverage all possible options — Budget, off-Budget including National Infrastructure Investment Fund, he said.
Sinha added that private consumption is expected to improve slightly next year mainly due to a mild uptick in rural demand, as Rabi crop this year is expected to be better than last year boosting rural consumption. PFCE growth is projected to rise to 6 per cent next year from 5.8 per cent this year. The agency also expects the government to maintain elevated spending despite fiscal constraints in order to support growth.
“A strong policy push coupled with some heavy lifting (even if this requires using the escape clause as suggested by the FRBM Review Committee headed by NK Singh) by the government is required to revive the domestic demand cycle and catapult the economy back into a high growth phase,” Ind-Ra said in its report. The FRBM panel had suggested a 0.5 percentage-point escape clause from the baseline fiscal deficit target to adjust with cyclical fluctuations in the economy.
The shortfall in the tax plus non-tax revenue will result in fiscal deficit slipping to 3.6 per cent of GDP (budgeted 3.3 per cent) in FY2020, even after accounting for the surplus transferred by the RBI, Ind-Ra said. Sinha said the Centre has to step up asset monetisation and disinvestment programme next year. Series of measures announced by the government recently to prop-up the economy, will come to aid only in the medium term, the agency said.
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