Moody’s Investors Service cut its growth forecast for India by 20 basis points after downside risks like stress in emerging markets, trade tensions between U.S. and China and the uptick in oil prices have materialised.
The Indian economy is currently in a cyclical recovery led by investment and consumption, the report stated, after growth took a hit because of the twin shocks of Goods and Services Tax implementation and demonetisation. “However, higher oil prices and tighter financial conditions will weigh on the pace of acceleration.” It now expects India’s GDP to grow at 7.3 percent in 2018, compared to the earlier forecast of 7.5 percent.
Among the downside risks that have come to pass is the “ongoing financial market turbulence in emerging market countries” which poses risks of a “broader negative spillover effect” on growth for a range of countries, Moody’s said in a report. Besides, there is a risk that high oil prices will weigh on purchasing power and present an upside risk to inflation, the report added.
A global rally in Brent crude prices led to a steep increase in fuel prices for 16 straight days, adding to inflationary pressure. This could dent GDP growth in the final year of the Narendra Modi-led administration. “The ongoing transition to the new GST regime could also weigh on growth somewhat over the next few quarters,” the report said.
On the flipside, growth should benefit from an acceleration in rural consumption supported by higher minimum support prices and a normal monsoon, the report said. “The private investment cycle will continue to make a gradual recovery, as twin balance-sheet issues — impaired assets at banks and corporates — slowly get addressed through deleveraging and the application of the Insolvency and Bankruptcy Code.”
Moody’s has maintained India’s GDP growth forecast for 2019 at 7.5 percent. It has slashed its forecast for Argentina, Turkey, Canada while raising those for Australia and South Africa.