India’s gross domestic product (GDP) growth may improve marginally to 5.5 percent in FY21 from 5.0 percent estimated by the National Statistical Office for FY20, says India Ratings and Research.
However, the downside risks to the growth are going to persist, according to the rating agency.
The slowdown in the economy is a combination of several factors such as an abrupt and significant fall in lending by non-banking financial companies, reduced income growth of households coupled with a fall in savings and higher leverage and the inability of the dispute resolution or judicial systems to quickly unlock the stuck capital, Ins-Ra said.
The Indian economy is stuck in a phase of low consumption as well as low investment demand, it added.
Ind-Ra believes a strong policy push coupled with some heavy lifting by the government is required to revive the domestic demand cycle and catapult the economy back into a high growth phase.
The government has announced a slew of measures recently to prop-up the economy, but Ind-Ra believes they will come to aid only in the medium term.
In the upcoming Union Budget, Ind-Ra expects the shortfall in the tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6 percent of GDP in FY20 as against budgeted 3.3 percent, even after accounting for the surplus transferred by the RBI.
A continuance of low GDP growth even in FY21 means subdued tax revenue and limited room for stepping-up expenditure, the agency said.
Ind-Ra believes the government will have to construct the FY21 budget in a way that expenditure is rationalised and prioritised and all avenues of revenue generation are tapped.
"While rationalising, the focus of expenditure has to be on creating direct employment and putting more money in the pockets of the people at the bottom of the pyramid. Since their marginal propensity to consume is close to one, they are likely to spend what they receive. This will support the consumption demand,” Ind-Ra said.
Therefore, budgetary allocation to heads such as rural infrastructure, road construction, affordable housing and MNREGA must be prioritized and allocation for non-merit subsidy/expenditure less critical for growth be rationalized, it added.
Further, Ind-Ra believes the government will continue to focus on infrastructure spending and leverage all possible options - budget, off-budget including National Infrastructure Investment Fund.
The agency expects gross fixed capital formation (GFCF) and government final consumption expenditure to grow at 5.3 percent and 9.0 percent, respectively, in FY21. Furthermore, Ind-Ra expects private final consumption expenditure (PFCE) to grow at 6.0 percent in FY21.
Moreover, retail and wholesale inflation is likely to average 3.9 percent and 1.3 percent, respectively, in FY21.
With some breakthrough in the US-China trade talks, Ind-Ra says the external environment to improve somewhat in FY21. This is likely to help India’s exports of goods and services to grow by 7.2 percent and the current account deficit to decline marginally to $32.7 billion, 1.1 percent of GDP in FY21.
In view of these developments, Ind-Ra expects the Indian rupee to average 73.0 against the dollar in FY21.
First Published: Jan 22, 2020 2:22 PM IST
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