India’s real GDP growth in 2019-20 fiscal is expected to be slightly below 5% as the impact of stimulus measures will take time to filter through to the economy, IHS Markit has said.
Latest GDP data for July-September quarter showed a significant further moderation in the pace of economic growth to 4.5%, the weakest in six years with a key contributory factor being a slump in manufacturing output.
For the first half of 2019-20 fiscal, GDP growth slowed to a pace of 4.8% compared to the 7.5% a year back.
“Financial sector fragilities continue to weigh on India’s economic growth momentum, with the high level of non-performing loans on the balance sheets of the public sector banks, constraining their new lending,” IHS said in a report.
“Following the weak GDP outturn for the September quarter, Indian real GDP growth in FY 2019-20 is expected to be slightly below 5%, as it is anticipated that the impact of stimulus measures will take time to filter through to the real economy,” IHS said.
The RBI also lowered its GDP growth forecast for 2019-20 from 6.1% to 5% on December 5.
“Confronted with the sharp slowdown in economic growth momentum, the Indian government will face increasing pressure to roll out additional fiscal measures to bolster manufacturing output and kick-start an upturn in the investment cycle. Such measures could include accelerated government spending on infrastructure projects such as roads, railways, and ports, as well as urban infrastructure such as affordable housing and hospitals,” it said.
IHS said given that the process of strengthening bank balance sheets has been slow, taking a number of years already, India’s financial sector problems are likely to remain a drag on the pace of economic growth over the medium-term outlook.
“Furthermore, any turnaround in the investment cycle could also be relatively protracted, depending on the ability of the government to accelerate its own infrastructure spending program,” it said.
The report added, “The Indian auto sector has slumped into a crisis, with hundreds of thousands of auto sector workers in the production and distribution segments having been laid off over the past 12 months”.
“This indicates that India’s investment cycle is experiencing a severe cyclical slowdown, as reflected in the further slowing of fixed investment growth during the September quarter,” it said. “The construction sector growth also slowed to a pace of 3.3% in the September quarter, compared with growth of 5.7% in the June quarter”.
Measuring GDP from the expenditure side, an important factor supporting the growth was public consumption, which rose by 15.6 per cent in the September quarter. Private consumption growth also picked up modestly versus the previous quarter, although it continues to expand at a much slower pace than in the past two financial years, IHS said.
“Although the RBI has also provided monetary policy stimulus through its monetary policy easing measures, the impact is likely to be more protracted, since monetary policy stimulus effects on the real economy generally act with long lags. Furthermore, the impaired balance sheets of many public sector banks and NBFCs also will dilute the flow-through of monetary policy easing to the economy,” it added.
(With Agency Inputs)