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India To See Only Modest Pick-Up In Growth in FY20: India Rating

Growth in the Indian economy is expected to pick-up only moderately even in the next financial year with private capex seen remaining sluggish.

According to India Ratings & Research, GDP growth is expected at 7.5 percent in 2019-20, slightly higher than the 7.2 percent growth seen in the current year. However, growth is expected to be better balanced across sectors next year, the rating agency said.

Growth, so far, has primarily been driven by private consumption expenditure and government consumption expenditure. Though investments are slowly and steadily gaining traction, they continue to primarily be driven by government capex with incremental private capex yet to see revival. Gross fixed capital formation is expected to grow at 10.3 percent in FY19, after growing 12.2 percent in FY19, estimates India Ratings.

Incremental private sector capex is unlikely to see a revival before FY21, India Ratings said.

The rating agency’s assessment of weak private capex trends is based on a study of top 200 non-financial asset-heavy corporates, it said.

The on-going slowdown in private corporate and household capex has prevented GDP growth from accelerating and sustaining close to or above 8 percent. Growth rate could also have been even higher if not for factors such as higher crude oil prices, a weakening rupee, frequent revisions in GST rates, agrarian distress, slow progress in resolving stressed assets and the liquidity crunch faced by non-banking financial companies after the IL&FS saga, said the note.

Inflation To Remain Benign

Inflation pressures are also expected to remain in check in the new financial year, predicts the rating agency. It expects wholesale and retail inflation to average 3.4 percent and 4.3 percent, respectively, in 2019-20.

“This may prompt the Reserve Bank of India to change its policy stance from calibrated tightening to neutral in the forthcoming February 2019 monetary review, but the agency believes a rate cut will happen in FY20,” said India Ratings.

Inflation has fallen below expected levels in 2018-19 due to lower food prices. Economists are uncertain about how long depressed food prices will persist and whether it will have a broader impact on inflation and growth in the economy.

Fiscal Pressures To Persist

India Ratings expects the government to breach its fiscal deficit target for a second consecutive year. The fiscal deficit for 2018-19 is likely to settle at 3.5 percent, higher than the 3.3 percent budget target.

The expected income support scheme for farmers could push up the fiscal deficit by 72 basis points in FY20. The scheme, while widely speculated upon, is yet to be announced.

Lower crude oil price will help bring down the current account deficit to 1.9 percent of the GDP in FY20 from 2.4 percent in FY19. The capital account is also 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 U.S. Dollar in FY20, said the note.

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