Moody’s Thinks India’s Growth Projections Are Ambitious

Moody's Investors Service on Tuesday said economic growth projections made by Finance Minister Nirmala Sitharaman in her Budget for 2020-21 appear ambitious given the structural and cyclical challenges facing the Indian economy.

The budget expects nominal gross domestic product growth of 10 percent in 2020-21, followed by 12.6 percent and 12.8 percent in FY2022 and 2023. But, Moody's saw GDP growth rising to around 8.7 percent in the next financial year beginning April 1 from about 7.5 percent in the current fiscal.

Stating that growth outlook will remain weak, it has put real GDP growth during the current fiscal ending March 31 at 4.9 percent, slightly below the government's forecast of 5 percent. For the next fiscal, it estimated real GDP growth of 5.5 percent, lower than 6-6.5 percent projected by the government's economic survey.

"Growth has remained relatively weak as a prolonged deleveraging cycle and ongoing stress among non-banking financial institutions, which has constrained the financial system's overall provision of credit, weigh on consumption and investment," it said in a detailed commentary on the Budget.

For the next 2020-21 fiscal, it lowered real GDP growth forecasts to 5.5 percent from 6.3 percent previous estimate. And for the following fiscal, it put the real GDP growth at 6 percent from 6.7 percent projected earlier.

"The significant slowdown in financial sector credit growth from NBFI liquidity constraints and asset quality issues among public sector banks has exacerbated prolonged weakness in private investment and a material decline in consumption, due in part to financial stress among rural households and weak job creation," Moody's said.

The nominal GDP growth, it said, has also declined significantly. Following 11.2 percent expansion in 2018-19, the government had forecast 12 percent nominal GDP growth in its July 2019 budget for the current fiscal.

However, according to the government's first advance estimate of GDP last month, nominal GDP growth is likely fell to a much lower rate of around 7.5 percent for full 2019-20. "These forecasts (made the Budget) appear ambitious given the combination of structural and cyclical challenges that the Indian economy faces," it said.

Moody's said the government will face challenges in achieving its deficit target for the fiscal year ending March 2021, amid persistent structural and cyclical headwinds to growth. Sitharaman is targeting narrowing of fiscal deficit to 3.5 percent of the GDP in the next financial year from 3.8 percent in the current fiscal -- wider than the 3.3 percent that the government previously predicted.

"While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilise," says Gene Fang, a Moody's Associate Managing Director.

"The debt burden is sensitive to nominal GDP growth, which we expect will remain lower on average than in the past. In light of India's weak fiscal health compared with its rating peers, any slippage in debt reduction will be credit negative."

The slippage in meeting fiscal deficit targets "reflects significantly weaker economic growth and revenue collection than the authorities forecast in July 2019," Moody's said. "Any material strengthening in India's public finances is unlikely in the near term as obstacles to growth persist."

It went on to state that prolonged weakness in nominal GDP growth and lower revenue collection raise the risk that the government debt burden does not stabilize. The rating agency said while the five-fold rise in deposit insurance limit to Rs 5 lakh is credit positive for banks, the Budget seeking dividends from state-owned companies that are higher than the tax-saving they got from the abolition of the dividend distribution tax was credit negative for oil and gas companies.

But, the rise in public infrastructure spending and tax exemptions for sovereign wealth funds was credit positive for the infrastructure sector, it said, adding quicker debt recovery and additional interest deduction on home loans was credit positive for Indian securitization transactions.

Moody's said even before the significant slowing in economic expansion in 2019, nominal GDP growth had averaged about 11 percent over the five years from 2014 to 2018. "We expect the economy to rebound at a more modest pace, with nominal GDP growth rising to around 8.7 percent in fiscal 2020 (2020-21) and 10.5 percent in fiscal 2021 (2021-22), from about 7.5 percent in fiscal 2019 (2019-20)," it said.

India's historically high rate of nominal GDP growth was an important driver of a declining debt burden in the past, from above 80 percent of GDP in the early 2000s to about 67 percent in 2010. "Given India's fiscal constraints, we believe that durable fiscal consolidation is only likely to occur if nominal GDP growth rebounds to at least 11 percent over the medium term," it added.