Fitch Rating slashes India's GDP growth forecast to 5.5% for FY20

Weakness has been fairly broad-based, with both domestic spending and external demand losing momentum, Fitch said

New lending as a proportion of gross domestic product (GDP) may dip to 6.6 per cent this fiscal year from 9.5 per cent in 2018-19 owing to a large squeeze in credit from non-banking financial companies (NBFCs).

These estimates assume that the sluggish pace of lending is maintained throughout the year, according to Fitch Rating.

The Indian economy decelerated for the fifth consecutive quarter in April-June (June quarter). GDP expanded by a meagre 5 per cent yoy, down from 8 per cent a year earlier. This is the lowest growth since 2013. Weakness has been fairly broad-based, with domestic spending and external demand losing momentum, Fitch said in a statement.

“We expect economic growth (in India) to be 5.5 per cent in 2019-20, before picking up to 6.2 per cent in 2020-21 and 6.7 per cent in 2021-22. Nevertheless, growth is likely to significantly below its potential over the next year or so,” it added.

Several factors, including a downturn in world trade and a severe credit squeeze, have taken a heavy toll on lending. NBFCs have faced a severe tightening of funding over the past year and a half. They have, in turn, sharply reduced the supply of credit to the commercial sector.

The auto and real estate sectors have been particularly hit by this. The data from the Reserve Bank of India (RBI) show that the flow of new lending from non-bank sources was down 60 per cent yoy between April and September. In contrast, banks’ lending has held up well in recent months, mitigating part of the shortfall in overall credit supply. However, bank lending could not prevent a sizeable credit crunch in the first half of 2019.

Fitch said the success of the inflation-targeting framework adopted by the RBI in 2016 in reducing inflation had been associated with sharply rising real lending interest rates since mid-2018. While the RBI has been able to lower interest rates, policy rate cuts have not been fully passed through to new rupee loans.

As a result, inflation-adjusted (real) borrowing costs have increased, weighing on credit demand. The lack of monetary policy transmission in India derives from high public-sponsored deposit rates against a backdrop of stretched banks’ balance sheets.

Competition from public schemes, which offer more attractive deposit rates to customers, have made banks reluctant to cut deposit rates. Banks have maintained elevated lending rates to preserve their margins amid high funding costs.

The authorities have taken measures over the past couple of months to shore up the economy and revive credit. For example, they are trying to ease NBFCs’ liquidity positions by encouraging banks to purchase high-quality NBFC assets through credit guarantees and additional liquidity.

The government also proceeded with further capital injections into banks and recently unveiled a plan to cut corporate tax rates.

Gloomy picture

• Downturn in world trade and a severe credit squeeze has taken a toll on lending
• NBFCs have faced tightening of funding over the past year-and-a-half
• This, in turn, sharply reduced supply of credit to the commercial sector
• RBI data shows that the flow of new lending from non-bank sources was down 60% YoY between April and Sept