Moody’s Investors Service has revised its GDP projection for India in 2020-21 to a 10.6% contraction compared to a 11.5% drop it had estimated. The rating agency has also marginally elevated its forecast for 2021-22 GDP growth from 10.6% to 10.8%.
“Consumer confidence in India remains relatively low amid a continued elevated number of daily new coronavirus cases, although this has come down from a peak in September,” Moody’s said in a note issued on Thursday.
“Estimates from the Centre for Monitoring Indian Economy show that unemployment remains high, although both urban and rural unemployment rates have recovered from peaks in April and May during the nationwide lockdown”, it noted.
Moody’s termed the Centre’s November 12 package of stimulus measures ‘credit positive’. It said they present ‘a potential upside to our current growth forecasts.’
“We currently expect India's growth to reach 10.8% in the fiscal 2021 [ending March 2022], compared with our earlier forecast of 10.6%, and to settle around 6% in the medium term. We have revised our real, inflation-adjusted GDP forecast for fiscal 2020 to a 10.6% contraction, from a 11.5% drop previously,” it stated.
Stimulus effects
“The latest measures aim to increase the competitiveness of India's manufacturing sector and create jobs, while supporting infrastructure investment, credit availability and stressed sectors,” it said on the package estimated to be worth about $36 billion or 1.4% of Moody's GDP forecast of this year.
“The latest package follows the INR 467 billion [0.2% of GDP] of stimulus announced in October and close to INR 2 trillion (1% of GDP) of direct spending allocated in the government's first stimulus package in May. The government expects that no new borrowing will be required to fund the additional spending,” it observed.
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Along with the wage support provided to businesses by the government in the form of new employees’ EPF contributions, the push to scale up production under the Production-Linked Incentives scheme could increase employment in India’s persistently soft labour market, Moody’s hoped.
The extension of the emergency credit line guarantee scheme till March 2021, with the inclusion of stressed sectors under its ambit, ‘will boost credit flow, a key element in the economy’s recovery’, it said.
Fiscal worries
“Stronger nominal GDP growth over the medium term would make it easier for India’s government to address its weak fiscal position, which the coronavirus has exacerbated; we forecast government debt to increase to 89.3% of GDP in fiscal 2020 and decline to 87.5% in fiscal 2021, from an already elevated 72.2% in fiscal 2019,” it stated.
“By contrast, we forecast the median for Baa-rated peers to rise to 60.8% in 2020. The country's mixed track record on revenue-raising measures lowers prospects for fiscal policy-driven budget consolidation. A sustained increase in GDP growth would, therefore, likely be a major driver of any durable future fiscal consolidation,” it said.
Moody’s expects the general government fiscal deficit to remain wide, reaching around 12% of the GDP, with some upside risk, in 2020-21, before narrowing to about 7% of GDP over the medium term, which would still be higher than the deficit of 6.5% of GDP recorded in 2019-20.
