India Ratings, a unit of Fitch Group, has predicted that India’s GDP growth will not return to the 6% or 7% rate in the next financial year due to structural problems, but will show a slight improvement over the current year.
The current year, which will end on March 31, is likely to see a GDP growth of 5%, while the next year, it will improve slightly to 5.5%, India Ratings said.
“..the Indian economy is stuck in a phase of low consumption as well as low investment demand,” the ratings agency said.
From 6.8% for the year ended March 2019, the current year is likely to see GDP growth fall to 5%, going by the numbers so far.
India Ratings identified the following three factors as contributing to the slowdown in the current year.
“An abrupt and significant fall in lending by non-banking financial companies close on the heels of a slowdown in bank lending, reduced income growth of households coupled with a fall in savings and higher leverage, and inability of the dispute resolution/judicial systems to quickly unlock the stuck capital.”
“Although some improvement in FY21 is expected, these risks are going to persist,” it added.
The government has announced a slew of measures recently to prop-up the economy, but Ind-Ra said it believes they will come to aid only in the medium term.
Therefore, it said, it is looking to the forthcoming union budget to unveil some more reforms.
“Ind-Ra believes the government will have to construct the FY21 budget in a way that expenditure is rationalised and prioritised and all avenues of revenue generation are tapped.”
While the government has cut taxes for companies as a part of its stimulus efforts, India Ratings said it has to focus on putting money in the hands of the man on the street.
“..the focus of expenditure has to be on creating direct employment and putting more money in the pockets of the people at the bottom of the pyramid. Since their marginal propensity to consume is close to one, they are likely to spend what they receive.
“This will support the consumption demand. Therefore, budgetary allocation to heads such as rural infrastructure, road construction, affordable housing and MNREGA must be prioritised and allocation for non-merit subsidy/expenditure less critical for growth be rationalised,” it said.
Meanwhile, Ind-Ra expects fiscal deficit — the shortfall between the government’s tax revenue and its expenditure — to rise to 3.6% of GDP against the target of 3.3% in the current year, even after accounting for the surplus transferred by the RBI.
It also predicted the rupee to fall to an average of 73 to the dollar in the next year due to various pressures, including continued poor performance on the external trade front.
Exports will continue to be under pressure due to the trade friction and protectionist policy pursued by many developed economies, the ratings agency said, predicting a 2% decline in exports in the current year.
“With some breakthrough in the US-China trade talks, Ind-Ra expects external environment to improve somewhat in FY21. This is likely to help India’s exports of goods and services to grow by 7.2% and the current account deficit to decline marginally to USD32.7 billion, 1.1% of GDP in FY21,” it added, projecting a current account deficit of $33.9 billion for the current year.
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