Citing a broad-based and severe cyclical slowdown, the World Bank has slashed its economic growth forecast for India to 6% for the current fiscal (FY20) from its April projection of 7.5%. It also warned that the severe slowdown could further weaken the country’s stuttering financial sector. In 2018-19, the growth rate of the country stood at 6.9%, down from 7.2% in the 2017-18 financial year. However, the bank in its latest edition of the South Asia Economic Focus said growth is expected to gradually recover to 6.9% in 2020-21 and 7.2% in 2021-22 as the cycle bottoms-out, rural demand benefits from effects of income support schemes, investment responds to tax incentives and credit growth resumes. Besides, exports growth is expected to remain modest, as trade wars and slow global growth depresses external demand.
The World Bank report said reflecting on the below-trend economic momentum and persistently low food prices, the headline inflation averaged 3.4% in 2018-19 and remained well below the Reserve Bank of India’s (RBI’s) mid-range target of 4% in the first half of 2019-2020. This allowed the RBI to ease monetary policy via a cumulative 135 basis point cut in the repo rate since January 2019 and shift the policy stance from ‘neutral’ to ‘accommodative’. It also noted that the current account deficit had widened to 2.1% of the GDP in 2018-19 from 1.8% a year before, mostly reflecting a deteriorating trade balance.
However, the report said disruptions brought about by the introduction of the GST and demonetisation, combined with the stress in the rural economy and a high youth unemployment rate in urban areas may have heightened the risks for the poorest households. The significant slowdown in the first quarter of the fiscal year and high frequency indicators, thereafter, suggested that the output growth would not exceed 6% for the full fiscal year. It said the consumption was likely to remain depressed due to slow growth in rural income, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from NBFCs. Though, the investment would benefit from the recent cut in effective corporate tax rate for domestic companies in the medium term, but also will continue to reflect financial sector weaknesses.
