Slowdown: Indian GDP growth may slip further to 5% in FY20, says CLSA

Analysts at CLSA believe India's fiscal deficit may worsen to 4.3% in FY20

The gloom surrounding the Indian economy is likely to get worse in the months ahead. If analysts at CLSA are believed, the growth in real gross domestic product (GDP) for financial year 2019-2020 (FY20) could slip to 5 per cent with risks to the downside. Their worst-case scenario is 50 basis point (bps) lower than this projection at 4.5 per cent.

“India is in the middle of a severe credit contraction that started with the liquidity squeeze triggered by the crisis in the non-bank finance companies (NBFCs), which has now spread to deposit-taking companies as well. India is growing below historical trend and there will be some pressure on broad consumption aggregates. Modi’s corporate tax cuts are bold but will take time to gain traction. India’s recovery will be postponed to late 2020,” said Eric Fishwick, chief economist at CLSA.

The recent economic data, too, has been worrisome. Index of Industrial Production (IIP) contracted by 4.3 per cent in September, the lowest in nearly eight years. The fall was steeper than the 1.4 per cent cut seen in August.

Another problem, Fishwick says, is the global financial markets are seeing the slowing growth in India as an isolated, easy-to-fix problem. “When you see the entire banking system becoming risk-averse, the reversal in slowdown and a change in sentiment takes a long time to fix. That said, we expect India to grow above-trend in FY21. That said, we rule out a V-shape recovery in FY20,” Fishwick adds. CLSA pegs GDP growth at 7.6 per cent in FY21.

Amid this and a worsening fiscal deficit, CLSA expects the Reserve Bank of India (RBI) to be aggressive in cutting rates and sees a 100 bps cut in repo rate from the current level of 5.15 per cent – 50 bps in the remaining part of FY20 and the balance 50 bps in early FY21. The government had estimated the fiscal deficit at 3.3 per cent in Union Budget for FY20.

“India is becoming more fiscally constraint. Government’s revenues are falling quite sharply and the recent cut in corporation tax adds to the concerns. The relief to the real estate sector will also not be instantaneous. All this will put pressure on the RBI to be more accommodative than what the most are expecting. As things stand, the government should borrow to provide more fiscal stimulus. We expect FY20 fiscal deficit at 4.3 per cent of GDP and can even inch higher,” said Anthony Nafte, senior economist at CLSA. 

CLSA forecasts 2019 global growth at 2.2 per cent, down from 2.9 per cent in the previous year, and slipping to a mere 1 per cent in 2020 before bouncing back to 2.2 per cent in 2021. The US Federal Reserve (US Fed), it says, is likely to cut rates four times in 2020.

“Weakness elsewhere means that the global economy is reliant on the US to drive growth. World trade growth has fallen to the lowest level since the Global Financial Crisis (GFC) with the US economy slowing from 3 per cent-plus growth in mid-2018 to 2 per cent today. We have cut our 2020 growth forecasts for those AxJ (Asia, ex-Japan) economies that are export driven. The world economy is facing clear headwinds and these will get worse,” Fishwick says.