New Delhi, October 10: Moody’s Investors Service on Thursday has revised down India’s growth to 5.8 per cent in the fiscal year ending in March 2020 from 6.8 per cent in fiscal 2018.
“The drivers of the deceleration are multiple, mainly domestic and in part long-lasting. What was an investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation. A credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem.
“Compared with only two years ago, the probability of sustained real GDP growth at or above 8 per cent has significantly diminished. While we expect a moderate pickup in real GDP growth and inflation over the next two years through monetary and fiscal stimulus, we have revised down our projections for both,” Moody’s said in its report.
The Reserve Bank of India (RBI) on October 4 has cut its GDP growth forecast to 6.1 per cent for 2019-20 from 6.9 per cent earlier.
Keeping in view that export prospects have been impacted by slowing global growth and continuing trade tensions, the six-member Monetary Policy Committee (MPC) of RBI has decided to slash GDP growth forecast.
Further elaborating on the situation, the Moody’s report stated the government's tax cuts, combined with lower nominal GDP growth, have dampened the outlook for fiscal consolidation and increased the risk that the debt burden, currently relatively high, may not stabilize – let alone decline. This denotes a weaker medium-term fiscal outlook than what we had previously expected.
“The Indian government has estimated that the corporate tax cut will reduce revenue by around INR 1.5 trillion ($21 billion, about 0.7 per cent of GDP) in fiscal 2019*. After factoring in exclusions for tax exemptions and the recent 0.3 per cent of GDP transfer of capital from the RBI, we expect a central government fiscal deficit of about 3.7 per cent of GDP in fiscal 2019, resulting in a slippage of 0.4 percentage points of GDP from the government's target,” it stated.
A structural need for spending on public sector salaries, welfare schemes and infrastructure is a major cause of India's deficit. So too is its limited tax revenue base, due to a large low-income population, with per-capita GDP of $7,874 in purchasing power parity (PPP) terms in 2018. Meanwhile, at around 23 per cent of revenue, interest payments are much higher than the 8 per cent median for rating peers. Greater reliance on state-owned enterprises to meet the country's need for social and physical infrastructure raises contingent liability risks for the sovereign.
“For these structural reasons, we have assessed that the outlook for the debt burden is significantly dependent on trends in nominal GDP growth. India’s historically high rate of nominal GDP growth was an important driver of a declining debt burden in the past, from above 80 per cent of GDP in the early 2000s to about 67 per cent in 2010,” Moody’s stated.