India Ratings and Research (Ind-Ra) expects GDP growth to be only a tad higher at 7.5% in FY20. Post demonetisation and GST implementation, the agency had expected FY19 to be a year of quick recovery and indeed the recovery has been sharp with GDP growth coming in at 7.2% (FY18: 6.7%). Ind-Ra believes GDP growth would have been even better but for the global headwinds caused by (i) an abrupt rise in crude oil prices and (ii) strengthening of USD and hiccups faced on the domestic front due to (i) frequent revisions in GST rates, (ii) continued agrarian distress, (iii) slow progress on Insolvency and Bankruptcy Code cases, and (iv) liquidity crunch faced by non-banking finance companies post IL&FS saga. However, GDP growth in FY20 will be more dispersed and evenly balanced across sectors as well as demand-side growth drivers.

Over the past few years, private final consumption expenditure and government final consumption expenditure have been the primary growth drivers of Indian economic growth. Ind-Ra believes investments are slowly but steady gaining traction with gross fixed capital formation growing 12.2% in FY19 and projected to clock 10.3% in FY20. This is certainly a comforting development, but the flip side of this development is that it is primarily driven by the government capex, as incremental private corporate capex has yet to revive. An Ind-Ra study of top 200 listed and unlisted non-financial asset-heavy corporates suggests that private sector capex is unlikely to revive before FY21. Ind-Ra believes that due to the slowdown in private corporate and household capex, the GDP growth has failed to accelerate and sustain itself close to or in excess of 8.0%. 

Like FY19, the agency expects all major sectors namely agriculture, industry and services to contribute to gross value added (GVA) growth in FY20 from the supply side. However, key support to the GVA growth is expected to come from services, followed by industry and they are expected to grow at 8.3% and 7.4%, respectively, in FY20. Under normal monsoons, agricultural GVA is expected to grow at 3.0%. All this would translate into overall GVA growth of 7.3% in FY20 compared to 7.0% in FY19. 

Overall, the pressure on wholesale/retail inflation is likely to remain benign, subject to normal monsoons and Indian crude oil basket averaging about USD55/barrel. Ind-Ra expects wholesale and retail inflation to average 3.4% and 4.3%, respectively, in FY20 (FY19: 4.9% and 3.5%). This may prompt the Reserve Bank of India to change its policy stance from calibrated tightening to neutral in the February 2019 monetary review, but the agency believes a rate cut will happen in FY20. Besides being data dependent, its timing will be influenced by the government stance on the fiscal front. Slippage on the fiscal front looks imminent, with fiscal deficit rising to 3.5% of GDP in FY19 instead of budgeted 3.3%. Also, there is a likelihood of a fiscal package for distressed farmers in the FY20 budget. In case the government decides to pay INR10,000/acre/year to small and marginal farmers, under ceteris paribus condition, this will push fiscal deficit of the central government by 72bp in FY20. Though not an easy option, if opted it will delay the rate cut process. 

Ind-Ra expects the benchmark 10 year G-sec bond yields to be in the 7.3%-7.4% range by FYE20, compared to 7.5%-7.6% by FYE19.

Aided by the softening of crude oil prices, Ind-Ra expects current account deficit to decline to 1.9% of GDP in FY20 from 2.4% of GDP in FY19. Even capital account is expected to record a surplus supported by foreign direct investments, foreign portfolio investments and banking capital inflows. This will help rupee to average 71.36 against the USD in FY20. 

Economic Outlook FY20

(% change, yoy)

FY14

FY15

FY16

FY17

FY18

FY19

FY20

GVA at FY12 prices

6.1

7.2

8.1

7.1

6.5

7

7.3

 - Agriculture

5.6

-0.2

0.6

6.3

3.4

3.8

3

 - Industry

3.8

7

9.8

6.8

5.5

7.8

7.4

 - Services

7.7

9.8

9.6

7.5

7.9

7.3

8.3

Real GDP

6.4

7.4

8.2

7.1

6.7

7.2

7.5

 - Private final consumption expenditure

7.3

6.4

7.4

7.3

6.6

6.4

7.3

 -  Government final consumption expenditure

0.6

7.6

6.8

12.2

10.9

9.2

10.8

 - Gross fixed capital formation

1.6

2.6

5.2

10.1

7.6

12.2

10.3

Nominal GDP

13

11

10.4

10.8

10.1

12.3

11.3

Average wholesale inflation

5.2

1.3

-3.7

1.7

2.9

4.9

3.4

Average retail inflation

9.4

5.9

4.9

4.5

3.6

3.5

4.3

Year-end interest rate (10-yr G-sec)

8.8

7.8

7.5

6.7

7.4

7.5-7.6

7.3-7.4

Average exchange rate (INR/USD)

60.5

61.14

65.47

67.07

64.45

69.79

71.36

Fiscal deficit (central government, % of GDP)

4.4

4

3.9

3.5

3.5

3.5

3.3

Current account deficit (% of GDP)

1.7

1.3

1.1

0.6

1.9

2.4

1.9

Source: Ind-Ra, Central Budget, Central Statistics Office and  Reserve Bank of India


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  • Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567255

    Dr Devendra Pant

    Chief Economist and Head Public Finance
    +91 11 43567251

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