India Ratings pegs FY21 GDP at 5.5%, warns of downside risks

New Delhi: Ratings agency India Ratings and Research has pegged India’s Gross Domestic Product (GDP) growth for 2020-21 at 5.5%, above the 5% growth that India’s statistics office expects for 2019-20.
“India Ratings and Research (Ind-Ra) expects gross domestic product (GDP) to grow at 5.5% year-on-year in FY21, however, the downside risks persist,” the agency said in a statement on Wednesday.

The slowdown, in the agency’s view, is a combination of several factors. These are an abrupt and significant fall in lending by non-banking financial companies close on the heels of a slowdown in bank lending, reduced income growth of households coupled with a fall in savings and higher leverage, and inability of the dispute resolution/judicial systems to quickly unlock the stuck capital.

“Although some improvement in FY21 is expected, these risks are going to persist,”

As a result, the Indian economy is stuck in a phase of low consumption as well as low investment demand.

It expects the shortfall in the tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6% of GDP (budgeted 3.3%) in FY20, even after accounting for the surplus transferred by the RBI.

Ind-Ra believes a strong policy push coupled with some heavy lifting (even if this requires using the escape clause as suggested by the FRBM Review Committee headed by N K Singh) by the government is required to revive the domestic demand cycle and catapult the economy back into a high growth phase.

The agency expects retail and wholesale inflation to average 3.9% and 1.3%, respectively, in FY21 (FY20: 4.4% and 1.4%). Food and crude oil prices are the key drivers of inflation in India.

External environment continues to be challenging for exports due to the trade friction and protectionist policy pursued by many developed economies.

“As a result, India’s exports of goods and services are likely to witness negative growth of 2% in FY20,” India Ratings said.