India Ratings and Research (Ind-Ra) said on Monday that it expects India's GDP growth rate during 2018-19 to be 6.9 per cent as against the advance estimate of 7 per cent.
It said the fourth quarter (January to March) GDP growth to decelerate to 6.3 per cent from 6.6 per cent in the third quarter (October to December 2018).
"There will be another fourth-quarter GDP slowdown starting from the fourth quarter of 2017-18. Clearly, FY19 will be the second consecutive year of an economic slowdown in India," said Ind-Ra.
Arresting the slowdown and reviving the economy will be the first challenge for the new government, it said. Policy prescription will require a granular analysis of the ills plaguing the economy.
In Ind-Ra's opinion, the new government will have to devise and execute both short-term and medium-to-long-term measures to arrest the slowdown. "While cyclical challenges can be addressed through short-term measures, the need of the hour is to address the structural challenges plaguing the Indian economy."
At the macro level, the revival of investment, resolution of credit freeze witnessed by the non-banking financial sector and worsening of global trade environment are the key challenges.
Although little can be done with regard to the global trade environment, certainly a more proactive policy intervention than followed so far can be pursued to aggressively revive investment. In Ind-Ra's opinion, such intervention should be a top priority of the new central government.
A step-up in government capital expenditure is indeed needed. However, it may be insufficient to provide a fillip to sagging growth because the general government capex accounts for only 12 per cent of investment in the economy.
Several high-frequency indicators -- automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports (non-oil, non-gold, non-silver, and non-precious and semi-precious stones) -- indicate a slowdown in consumption, especially private consumption despite low inflation in the economy.
The consumer price index inflation declined to 2.46 per cent in Q4 of FY19. No doubt sustained low inflation aids an economy in many ways, but it has a flip side too. It reduces the nominal rate of growth and translates into low-income growth, leading to reduced aggregate demand in the economy.
This scenario is reflected in private final consumption expenditure growth.
Nominal gross value added (GVA) is the sum of EBIDTA (earnings before interest, tax, depreciation, and amortisation) and wages in a corporate balance sheet. It indicates how income generated by a corporate entity is shared between the two key factors of production: capital (including land) and labour.
Subdued nominal GVA growth due to low inflation means subdued EBIDTA and wage growth impacting consumption demand. Nominal GVA growth decelerated to 11 per cent in Q3 of FY19. Even more worrisome is the deceleration in the nominal GVA growth of agriculture and allied activities to two per cent.
In Ind-Ra's opinion, this sharp decline in the nominal GVA growth of agriculture and allied activities has morphed into the ongoing rural distress.
The revival of the growth in FY20 either through fiscal or monetary stimulus, will not be easy for the new government.
On the fiscal front, the headroom available is quite limited in view of the fiscal deficit budgeted at 3.4 per cent of GDP for FY20.
Also, financing fiscal deficit will be expensive in view of household sector financial savings net of financial liabilities falling short of the net government borrowings (centre, state and centre's extra-budgetary resources).
Despite two consecutive rate cuts by the Reserve Bank of India, the borrowing cost in the market has remained at a relatively elevated level because of this shortfall.
A slowdown in the growth of household savings has rendered deposit and investment mobilisation by banks and non-banking financial companies expensive and the transmission of the policy rate cut is not finding a quick resonance in the financial market.
Moreover, banks are struggling with high non-performing assets, while non-banking financial companies face credit freeze.
Therefore, Ind-Ra believes even monetary stimulus under the current situation may not be able to do the desired trick.
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