Banks have been both unwilling to lend and to lower lending rates despite successive interest rate cuts by the central bank
Moody's Investors Service on Monday revised its growth forecasts for India to 5.4 per cent for 2020 calendar year and 5.8 per cent for 2021, down from its previous projections of 6.6 per cent and 6.7 per cent.
India's economy has decelerated rapidly over the last two years and economic recovery will likely be shallow, it said in the February update of global macro outlook.
The country's real GDP grew at a meagre 4.5 per cent in Q3 2019. Improvements in the latest high-frequency indicators such as PMI data suggest that the economy may have stabilised.
"While the economy may well begin to recover in the current quarter, we expect any recovery to be slower than we had previously expected. Accordingly, we have revised our growth forecasts to 5.4 per cent for 2020 and 5.8 per cent for 2021, down from our previous projections of 6.6 per cent and 6.7 per cent respectively," said Moody's.
A key to stronger economic momentum will be the revival of domestic demand, both rural and urban. But equally important is the resumption of credit growth in the economy.
As data from the Reserve Bank of India (RBI) shows, credit impulse in the economy has deteriorated throughout the last year as a result of the drying up of lending from non-bank financial institutions as well as from banks.
Banks have been both unwilling to lend and to lower lending rates despite successive interest rate cuts by the central bank. As a result, non-food bank credit growth decelerated to 7 per cent in nominal terms in December 2019, down sharply from 12.8 per cent a year earlier.
The deterioration in credit growth to the commercial sector is particularly stark, said Moody's. Nominal credit to industry grew at only 1.6 per cent year-on-year in December 2019 while credit to the services sector registered 6.2 per cent nominal growth, and credit to agriculture and related activities grew 5.3 per cent.
"With a weak economy and depressed credit growth reinforcing each other, it is difficult to envision a quick turnaround of either-even if economic deceleration may have troughed," said Moody's.
On the fiscal front, the Union Budget 2020 did not contain a significant stimulus to address the demand slump. As similar policies in other countries have shown, tax cuts are unlikely to translate into higher consumer and business spending when risk aversion is high.
"We expect additional easing by the RBI. However, if the recent rise in CPI inflation, mainly as a result of higher food prices, is seen to have second-round effects, this will make it more challenging for the central bank to cut interest rates further," it said.
Meanwhile, Moody's said the coronavirus epidemic creates new risks to the prospects of an incipient stabilisation of global growth this year resulting from a truce in the US-China trade war and emerging signs of a pickup in the industrial sector.
It revised its global growth forecasts down by two-tenths of a percentage point, now expecting G-20 economies to collectively grow at an annual rate of 2.4 per cent in 2020.
The rating agency has also revised downward the GDP growth forecasts for China to 5.2 per cent in 2020 and maintained an expectation of 5.7 per cent growth in 2021.
"The toll on the global economy will be severe if the rate of infections does not abate and the death toll continues to rise. If the outbreak persists, the domestic and international supply chain disruptions are likely to become significant, amplifying the shock to the global economy," it added.