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Moody’s cuts India’s 2020 growth forecast to 5.4% amid coronavirus fears

Global rating agency Moody’s said on Monday that India’s economic recovery is likely to be shallow and expand at a lower pace of 5.4 per cent in Calendar 2020 than the earlier estimate of 6.6 per cent.

In a review of the global economy to asses likely to impact on Coronavirus outbreak, Moody’s said it (virus and its spread) has diminished optimism about prospects of an incipient stabilisation of global growth this year.

With the virus continuing to spread, it is still too early to make a final assessment of the impact on China (A1 stable) and the global economy.

India’s economy has decelerated rapidly over the last two years. the real gross domestic product grew at a meagre 4.5 per cent the third quarter of calendar Q3 2019. Improvements in the latest high-frequency indicators such as PMI data suggest that the economy may have stabilised.

Moody’s said, “while the economy may well begin to recover in the current quarter, we expect any recovery to be slower than we had previously expected”. Accordingly, the revised forecasts for growth of the Indian economy are 5.8 per cent for 2021 (as against previous projection of 6.7 per cent for 2021).

A key to stronger economic momentum would be the revival of domestic demand, both rural and urban, in India. But equally important is the resumption of credit growth in the economy.

As data from the Reserve Bank of India (RBI) shows, credit impulse has deteriorated throughout the last year due to drying up of lending from non-bank financial institutions as well as from banks.

Banks have been both unwilling to lend and to lower lending rates despite successive interest rate cuts by the central bank. As a result, non-food bank credit growth decelerated to 7 per cent in nominal terms in December 2019, down sharply from 12.8 per cent a year earlier.

The deterioration in credit growth to the commercial sector is particularly stark. Nominal credit to industry grew at only 1.6 per cent year-on-year in December 2019, while credit to the services sector registered 6.2 per cent nominal growth, and credit to agriculture and related activities grew 5.3 per cent.

It revised global GDP growth forecast down and expects G-20 economies to collectively grow 2.4 per cent in 2020, a softer rate than last year, followed by a pickup to 2.8 per cent in 2021.

Moody’s said its baseline scenario assumes that the outbreak will cause disruption in Q1 economic activity. The spread of the coronavirus will be contained by the end of Q1, allowing for the resumption of normal economic activity in Q2.

At present, China’s economy is by far the worst affected. However, the rest of the world also has exposure as a result of a hit to global tourism in the first half of this year and short-term disruptions to supply chains.

The effects on the global economy could compound if the rate of infection does not abate and the death toll continues to rise. The supply chain disruptions in manufacturing would become more acute the longer it takes to restore normalcy, it added.

Source: Business Standard