Economic slowdown: Pain may deepen in 2020, first half could be rough

Economists are projecting growth to settle somewhere between 6 and 6.5 per cent in FY21, but none dare to go near the 7 per cent mark, last seen in FY18.

Published: 29th December 2019 07:50 AM  |   Last Updated: 29th December 2019 01:05 PM   |  A+A-

Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman (Photo | PTI)

Express News Service

HYDERABAD:  The year 2019 began with friendly, blue-sky thinking, but we are exiting with growth feeling unloved by all economic indicators. Forecasts and high-frequency data are coming in thick and fast that you cannot look away even one moment without despair.

Will 2020 be good to us? Maybe, but not in the first half. In a early warning, the IMF just confirmed that the ratings downgrade parade will continue in January, when it will lower India’s FY20 growth estimate, yet again. Remember, you have been informed. One can be optimistic and not fret about FY20 anymore as only three months left in the fiscal.

But the real worry now shifts to FY21 and if, when, and how the economy will be any better? All economists, who forewarn risks and crises for a living, are projecting growth to settle somewhere between 6 and 6.5 per cent in FY21, but none dare to go near the 7 per cent mark, last seen in FY18. That’s because, we are caught in an uncontrollable spiral of falling investments, demand and jobs that finding our way out has become a prolonged national nightmare. The persistent unwillingness of corporates and consumers to spend, compels the centre to splurge. But experts warn that even government spending has become a spent force. 

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“We don’t see room for fiscal stimulus to stem the downturn. We think that if the average fiscal deficit of 7.7 per cent of GDP for the past three years has not boosted growth, another round of stimulus might not either. Even if it does, unless policy measures to address the causes of the slowdown are implemented, such a pick-up would be unsustainable and probably leave India more vulnerable down the line,” said Anubhuti Sahay Head, South Asia Economic Research (India), Standard Chartered Bank.

While consensus predictions of GDP growth at about 5 and 6 cent in FY20 and FY21 respectively is based on a presumed uptick in spending and production, which in turn are a logical reaction to recent monetary and fiscal policy interventions, former chief economic adviser Arvind Subramanian pointed towards a real estate non-bubble, bubble, and how it could unload a fresh bout of NPAs via NBFCs, intensifying the economic slowdown just when it starts picking up pieces. 

RBI Governor Shaktikanta Das, while lowering FY20 GDP estimates sharply to 5 per cent, indicated that green shoots were visible, though few share the sentiment. After the RBI downgrade, Moody’s joined the list revising its already corrected estimate to 4.9 per cent from 5.8. The financial stress among rural households and sluggish job creation may have dragged growth lower, but as Subramanian noted, the financial sector clean-up remains incomplete even five years after the exercise began.

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The anticipated NBFC crisis shook the Asian Development Bank (ADB) so much that its growth revision for India was much sharper than China, which clearly is in a far deeper mess thanks to the trade war dispute with the US, falling domestic demand and the global slowdown. Yet, China is projected to grow at 6.1 per cent in FY20 as against ADB’s earlier forecast of 6.2 per cent, while India’s estimate came down from 6.5 to 5.1! Besides NBFC stress, the blame for slowdown is partly shared by weak consumption, rural distress and dismal job creation.

GDP growth in September quarter stood at a six-year-low of 4.5 per cent, but analysts believe, the economy hasn’t troughed. Worryingly, households’ inflation expectations for next three months continue to be high, which partly dampened the festive season sales, evidence of which can be seen from bank credit flow to non-food, consumer durables and auto sales. Others like industrial output, and exports continue to slide, suggesting that an upward momentum seen in some parameters like rail and air traffic could be only temporary.

Nikhil Gupta, research analyst, Motilal Oswal, said, rising government spending on the rural sector, unusually strong water reservoir levels and pick-up in Rabi crop sowing, there were sufficient signs of rural sector bottoming out. “Nevertheless, even if the rural sector picks up in some time, total consumption growth may continue to remain subdued as the urban sector has weakened sharply in FY20 and is not showing any signs of abatement,” he added. 

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Similarly, DBS Banking Group shaved off India’s growth estimates by 50 bps from 5.5 to 5 per cent for FY20. In its ‘India Annual Scenario 2020’, DBS noted that the Indian economy has been dominated by a sharp decline in economic activity and challenges in the financial sector. “This softening is due to many factors. This suggests that the pace of improvement may slow down in 2020 as well,” it noted.

Ratings downgrade comes despite govt measures
The IMF projected a 7 per cent growth in FY20, hoping the government measures will revive the economy. However, given the sharp decline in leading economic indicators the IMF explicitly noted that a further rate revision is coming in January


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