Global ratings agency Moody's Investors Service on Monday lowered India's gross domestic product growth projection for the fiscal year 2019-20 to 4.9 per cent from 5.8 per cent, citing weak household consumption. Moody's said that India's weak household consumption will curb economic growth and weigh on the credit quality of Indian issuers in a range of sectors.
India's gross domestic product (GDP) growth rate fell to 6-year low of 4.5 per cent during July-September quarter, from 5 per cent in the preceding quarter as manufacturing output contracted. This was also the sixth successive quarters of declining GDP growth equalling the longest slowdown in the past 23 years.
According to Moody's, the slower economic growth over the last few quarters will reduce the debt servicing capabilities of households, which in turn will weaken the asset quality of retail loans across all segments. Private-sector banks have a larger exposure to retail loans and may be more at risk. However, an increase in nonperforming loans (NPLs) should be gradual, it said.
"What was once an investment-led slowdown has now broadened into weakening consumption, driven by financial stress among rural households on the back of stagnating agricultural wage growth and constrained productivity, as well as weak job creation due to rigid land and labor laws," said Deborah Tan, a Moody's Assistant Vice President and Analyst.
The credit crunch among non-bank financial institutions (NBFIs), which have been major providers of retail loans in recent years, has exacerbated this slowdown, the agency said.
"While the income shock to households has been unfolding over several years, it was not visible on headline growth as long as households could borrow from NBFIs. With the materialization of a credit supply shock, we now see the impact of these twin shocks on growth," added Tan.
Earlier in November, Moody's had revised its sovereign rating outlook for India to 'negative' from 'stable'.
Meanwhile, Moody's expects that government measures to stimulate domestic demand - including income support for farmers and low-income households, monetary policy easing and a broad corporate tax cut - will be limited in offsetting this slowdown.
"Although a modest recovery is expected for next year, supported partly by spillovers from policy stimulus, economic growth will be weaker than in recent years, which will have negative credit implications for Indian issuers in a range of sectors," the report said.
Commenting on automobile sector, the agency said that weak demand and tight liquidity will constrain automakers' earnings. Although delinquencies in auto asset-backed securities (ABS) have not increased significantly, the performance of commercial vehicle loans backing ABS deals could deteriorate if economic conditions remain subdued for a prolonged period, it added.
Edited by Chitranjan Kumar