Current India Slowdown Differs From 2008, Demonetisation Period: Goldman Sachs
Labourers waiting for work at fort market in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Current India Slowdown Differs From 2008, Demonetisation Period: Goldman Sachs

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The consumption slowdown, a major pain point for the Indian economy, cannot be attributed to the NBFC crisis as it predates the first default by Infrastructure Leasing & Financial Services Ltd. in September 2018.

That’s according to the India chief economist of Goldman Sachs Group Inc., which has cut its India GDP growth forecast to 6 percent with downward bias.

Many attribute the consumption slowdown to the NBFC crisis that began after IL&FS went belly up last year. As a result, consumption financing by non-banking financial companies came to a standstill.

According to Prachi Mishra, chief economist at Goldman Sachs, consumption has been falling since January 2018—much before the IL&FS defaults that started August-end.

She said the fall in consumption, coupled global slowdown and funding constraints, is responsible for a third of the overall dip in India’s GDP growth. "There is a slowdown and the growth numbers have fallen by 2 percentage points," Mishra said, speaking at an event organised by The Economist magazine.

But Mishra expects growth to tick up in the second half of 2019-20, courtesy the easy money policy of the Reserve Bank of India and the massive tax reliefs to corporates.

RBI has cut its repo rate, the rate at which it lends to commercial banks, by 135 basis points so far in 2019—bringing the benchmark to a decadal low of 5.15 percent.

On Sept. 20, Finance MInister Nirmala Sitharaman effected a corporate tax cut that will cost the exchequer Rs 1.45 lakh crore.

According to the Goldman Sachs chief economist, Investments and exports have been sliding for a long time, but it is the steep consumption slowdown which is the new pain area.

"The present slowdown is protracted and has lasted for over 20 months now," Mishra said. This is different from the growth headwinds like demonetisation or even the 2008 financial crisis, which were temporary in nature, she said.

India’s gross domestic product expanded by 5 percent in April-June 2019, the slowest pace of growth in six years. A rash of downward revisions in India’s growth forecasts followed, including those by the International Monetary Fund, World Bank and RBI.

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