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India Ratings cuts GDP growth to 6.1% for FY20

Earlier in August 2019, the rating agency had revised GDP growth estimate to 6.7% from its earlier forecast of 7.3%

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India Ratings cuts GDP growth to 6.1% for FY20
Ind-Ra said it expects the GDP growth in the first half of the financial year 2019-20 to be 5.2% and forecasts it to recover to 6.9% in 2HFY20

India Ratings and Research (Ind-Ra), a part of Fitch group, on Thursday lowered India's gross domestic product (GDP) forecast for the financial year 2019-20 to 6.1%. This was the second downgrade in the last two months. Earlier in August 2019, the rating agency had revised GDP growth estimate to 6.7% from its earlier forecast of 7.3%.

"Ind-Ra has revised its FY20 gross domestic product (GDP) growth down to 6.1% following Central Statistical Organisation (CSO) estimating 1QFY20 GDP growth to be 5.0%, much lower than Ind-Ra's estimate of 5.7%," the agency said in its latest report. The agency has also cited a slowdown in both urban and rural consumption demand growth as one of the key reasons for the downward revision of GDP in its August 2019 forecast.

Ind-Ra said it expects the GDP growth in the first half of the financial year 2019-20 to be 5.2% and forecasts it to recover to 6.9% in 2HFY20, mainly on account of the base effect.

Ind-Ra's report stated that although the agency welcomes the recent measures announced by the government to arrest the economic slowdown, it believes they are likely to support growth only in the medium-to-long term.

The agency stated that the bigger challenge facing the economy is from the demand side as consumption demand has collapsed and private corporate investment is not forthcoming, while most of the measures announced by the government were essentially a supply-side response to revive growth.

The rating agency, therefore, believes that the need is to take measures that will enhance the disposable income and put additional money in the hands of rural and urban households, added with government-initiated spend on rural infrastructure activities to generate large-scale employment that could add/stimulate consumption demand.

As per the report, the key drivers of inflation in India are food and crude oil prices, that stand favourable/benign currently and are likely to remain the same during the remainder of the financial year.

The report further added that the agency expects inflation based on Wholesale Price Index and Consumer Price Index to remain moderate at 3.0% and 3.7%, respectively, in FY20 (FY19: 4.3% and 3.4%). The agency, therefore, believes that there is still a window for another 50 basis points rate cut in the near term. The RBI has cut the policy rate by 135 basis points since February 2019.

As per Ind-Ra's calculations, the fiscal deficit that has been budgeted at 3.3% of GDP, could increase to 3.6% of GDP in FY20. Additionally, the report added that the current account deficit is expected to decline to 1.8% of GDP in FY20 from 2.1% of GDP in FY19, aided by softer crude oil prices.

In terms of the domestic currency, Ind-Ra expects the Indian rupee to average 70.86 against the dollar in FY20.

By Rupa Burman Roy

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