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Stimulus Measures to Support Sentiment But Headwinds to Drag Growth to 6.4%: Moody's

Commenting on the measures announced by FM Nirmala Sitharaman last week, William Foster, Vice President, Sovereign Risk Group, Moody's Investors Service said GDP growth rate will pick up next fiscal year to 6.8 per cent.


Updated:August 27, 2019, 6:39 PM IST
Stimulus Measures to Support Sentiment But Headwinds to Drag Growth to 6.4%: Moody's
A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York.

New Delhi: The raft of measures announced by the government to boost the sagging economic growth will provide some support to investor and business sentiments, but domestic and external headwinds will continue to persist through the year, resulting in a 6.4 per cent GDP growth, Moody's Investors Service said on Monday.

Commenting on the measures announced by Finance Minister Nirmala Sitharaman last week, William Foster, Vice President, Sovereign Risk Group, Moody's Investors Service said GDP growth rate will pick up next fiscal year to 6.8 per cent.

The measures announced, including an offer of tax incentives and some reforms across a variety of sectors, were an effort to stimulate slowing economic growth, he said.

"We expect the measures to provide some support to investor and business sentiment, and the acceleration of the capitalization of public sector banks to help improve the provision of credit and transmission of monetary policy easing," he said.

"However, we also expect domestic and external headwinds to persist over the course of the year, resulting in 6.4 per cent real GDP growth in the fiscal year ending in March 2020, before growth picks up to 6.8 per cent next year."

Moody's had last year lowered India's GDP growth forecast for the 2019 calendar year to 6.2 per cent from the previous forecast of 6.8 per cent. India's economic growth momentum has been slipping since the last 3-4 quarters. Not only did GDP growth fall to a 20-quarter low of 5.8 per cent in January-March, leading indicators point towards further weakening of growth momentum to about 5.5 per cent in Q1 (April-June) 2019-20, said Shubhada Rao, Chief Economist, Yes Bank.

"While there is some degree of inevitability in the current phase of domestic growth slowdown on account of weakening of global growth impulses, the impact appears to have been accentuated by few domestic factors," Rao said.

While the telltale signs of distress emanated from the rural part of the economy, sectors like NBFCs, automobile, real estate, and FMCG had started to come under pressure. Given this subdued backdrop, the Finance Minister's announcement of comprehensive steps to revive economic growth is most welcome, Rao said, adding this timely policy intervention (ahead of the upcoming festive season) should help in breaking the vicious circle of subdued sentiment leading to weak economic growth, and vice versa.

The decision to provide tax relief for foreign portfolio investors (FPIs) and start-ups, coupled with targeted steps for the automobile sector should help in reviving demand conditions. The most important announcement made by the Finance Minister was the front-loading of budgeted recapitalization amount for PSU banks (Rs 70,000 crore) in 2019-20 along with the time-bound release of GST refunds for MSMEs.

The measures, Rao said, should help in boosting the credit multiplier with a lag, thereby uplifting formal economic transactions and the concomitant tax revenue collections.

"While we stick to our FY20 GDP growth forecast of 6.7 per cent with some downward bias, these measures should help in arresting further downside risk, and laying the foundation for a higher growth trajectory in FY21," Rao said.

Radhika Rao, Economist, Senior Vice President at DBS Bank said the policy intervention is directed at breaking the cycle of weak sentiments amplifying weak activity.

"These measures are timely as the government looks to reverse the cyclical slowdown in certain sectors that are under stress. With most of these steps concerned with streamlining existing measures, clearing credit blockages and expediting already announced measures, fresh fiscal costs will be limited," she said.

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