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India Ratings revises FY20 GDP to 5.6%

2QFY20 GDP growth seen at 4.7%.


2QFY20 GDP growth seen at 4.7%.



India Ratings and Research (Fitch Group) has revised Indian GDP growth forecast for FY20 to 5.6%, the fourth revision and comes in after the it had revised its FY20 GDP growth forecast only a month ago to 6.1%.

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% is unlikely to hold.

The new projection suggests that 2QFY20 GDP growth is likely to be 4.7%.

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%, said the agency on 26 Nov 2019.

Furthermore, the 5.6% GDP growth will require heavy lifting by the government.

Although government expenditure did not witness much traction in 1QFY20 due to parliamentary elections, it picked up significantly in 2QFY20.

Combined capital and consumption expenditure of central and 20 states government in 2QFY20 grew 37.8% (1QFY20: -18.3%, 2QFY19: 11.7%) and 20.1% (1QFY20: 4.1%, 2QFY19: 14.7%) respectively, and Ind-Ra expects it to continue in 2HFY20 leading to central government’s fiscal deficit coming in at 3.6% of GDP. If the central government adheres to the budgeted fiscal deficit of 3.3% of GDP by cutting/rolling over expenditure, then Ind-Ra believes FY20 GDP growth could be even lower than 5.6%.

Private final consumption expenditure (PFCE) growth is now expected to grow 4.9% in FY20 (previous forecast 5.5%), significantly lower from 8.1% in FY19, slowest since FY13 (new series data is available from FY12).

Ongoing agrarian distress and dismal income growth so far, coupled with subdued income growth expectation in urban areas have weakened the consumption demand considerably. Even the festive demand has failed to revive it and this is reflected in the current data of non-food credit, auto sales and select fast moving consumer goods.

Even investment expenditure growth, as measured by gross fixed capital formation (GFCF), is expected to moderate to 6.0% in FY20 (earlier forecast 7.0%) from 10.0% in FY19, which will be a five-year low.

Wholesale/retail inflation is likely to remain benign; although some pressure on this front may emerge from the rising inflation on select food items.

Ind-Ra expects inflation based on the Wholesale Price Index and Consumer Price Index (CPI) to come in at 1.5% and 3.9%, respectively, in FY20 (FY19: 4.3% and 3.4%). Despite rising inflation in select food items, relatively weak demand conditions have kept the pricing power of manufacturing sector under check.

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.

Despite the likely fiscal stress arising out of the reduction in corporate tax rate, the government has not announced any change in its 2HFY20 borrowing programme.

Given the RBI’s guidance to continue with the accommodative monetary policy stance, Ind-Ra expects the benchmark 10-year government-security (G-Sec) bond yields to trade in the range of 6.5%-6.6% by FYE20 (FYE19: 7.5%).

However, a higher government borrowing during 2HFY20 may push interest rates higher.

Ind-Ra expects current account deficit to decline to 1.8% of GDP in FY20 (FY19:2.1%) aided by the softer crude oil prices and lower capital goods import and Indian rupee to average 71.06 against the US dollar in FY20.

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