5 Agencies Slash India’s GDP Rates; When And How Will Growth Pick-Up?

Until a few months ago, there was no talk of reducing India's GDP numbers. However, suddenly we are seeing almost all the leading agencies slashing India's growth rate, as consumer spending drags growth lower. Take a look at what the leading agencies have projected for 2019-20.

Worst growth rate prediction from Moody's

Global rating agency Moody's has given the worst growth outlook scenario. It is projecting a GDP of just 5.8 per cent. Interestingly, the agency also believes that the slowdown could be a little long-lasting.

"The drivers of the deceleration are multiple, mainly domestic and in part long-lasting," the ratings agency said in its report. It expects growth to pick up to 6.6% in FY21 and around 7% over the medium term.

The RBI in the past had got the GDP prediction completely optimistic. However, in last week's monetary policy it revised the growth outlook sharply lower. This saw some reaction in the stock markets too.

The RBI sharply cut the GDP growth projection for FY2020 from 6.9 per cent (made in its August policy statement) to 6.1 per cent. In just a span of a few months, the country's central bank cut rates very sharply.

The Asian Development Bank continues to remain the most optimistic on 2019-20 growth rates, with a figure of 6.5 per cent. With almost half the year over and no signs of high frequency data showing a turnaround, this might remain far-fetched. This is because to achieve this number growth rates in the second half would need to be stupendous.

Is there a light at the end of the tunnel?

Two things are happening right now. The first is that consumers are unwilling to spend, especially when there is a gloom around jobs data. Rural spending has almost collapsed thanks to a slowdown in the rural incomes. Several million people linked to the auto sector or construction sector directly or indirectly have either lost jobs or are struggling to retain their jobs.

On the other hand, private investment is just not picking-up.

Will cut in corporate tax increase investment?

There are hopes that the cut in corporate tax rates would push companies to go ahead and invest. It is unlikely that this would happen, given the poor consumer sentiment. Why will a corporate go out and spend, if there is no demand? What may in fact happen is that corporates may declare increased payouts through way of dividends, which may benefit shareholders.

The country's central bank has already gone ahead and cut interest rates a number of times. This has hardly helped, at least in the short term it has not.

Steps the government could take

Clearly, there could be several steps that the government could take. For the time being it may have to ignore fiscal deficit and push growth, though fresh measures. It can reduce the income tax rates, as well, which could increase income in the hands of the consumers and push spending. In fact, it may have been wiser to cut personal income tax rates, rather than corporate tax rates.

In any case, pushing growth rates may now become a priority over fiscal prudence. Let's hope for some more measures from the government in the coming days.

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