American credit rating agency Fitch Ratings’ company India Ratings and Research has revised its growth forecast for India in the 2019-’20 financial year to 5.6%. The agency had revised its 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 second quarter GDP growth coming in a little higher than 5% is unlikely to hold,” it added. “The new projection suggests that second quarter GDP growth in 2019-’20 financial year is likely to be 4.7%. Despite favourable base effect, declining growth momentum suggests that even the second half of the financial year will now be weaker than previously forecasted and is likely to come in at 6.2%.”
To achieve the current projected figures, the government will have to do some heavy lifting, said the credit rating agency. “Although government expenditure did not witness much traction in the first quarter of the current financial year due to parliamentary elections, it picked up significantly in the next one.”
The company said wholesale inflation was likely to “remain benign” even though “some pressure on this front may emerge from the rising inflation on select food items”. In October, retail inflation had risen to 4.62%, breaching the Reserve Bank of India’s medium-term target of 4% for the first time since July 2018. The Consumer Food Price Index of inflation stood at 7.89%, compared to 5.11% the month before.
“Ind-Ra expects inflation based on the Wholesale Price Index and Consumer Price Index to come in at 1.5% and 3.9%, respectively, in FY20 (FY19: 4.3% and 3.4%),” said the company. “Despite rising inflation in select food items, relatively weak demand conditions have kept the pricing power of manufacturing sector under check.”
The company said it expects current account deficit to decline to 1.8% of GDP in the financial year, aided by the softer crude oil prices and lower capital goods import, and the Indian rupee averaging 71.06 against the US dollar.
The Indian economy grew just 5% in the April-June 2019 quarter, the slowest in six years. Industrial output in September contracted 4.3% when compared to same month last year. In May, the government had released a report by the National Sample Survey Organisation that showed that India’s unemployment rate rose to a 45-year high of 6.1% in 2017-’18. Another survey showed that the monthly per capita consumption expenditure has declined for the first time in 2017-’18 since the 1970s.
“Ongoing agrarian distress and dismal income growth so far, coupled with subdued income growth expectation in urban areas have weakened the consumption demand considerably,” the company noted. It said the festive season had failed to revive demand. “This is reflected in the current data of non-food credit, auto sales and select fast moving consumer goods,” it said.