Indian economic growth likely to slow down in FY 2019-20 to lowest since global financial crisis

The real GDP growth of India in the 2019-20 financial year is expected to ease to 5 percent rate year-on-year, considerably below the 6.8 percent seen in the 2018-2019 financial year, according to the First Advance Estimate of Indian GDP. This will be the lowest rate of GDP growth in India for a full financial year since the global financial crisis in 2008-2009.

The manufacturing sector slump is the key factor driving the sharp deceleration of India’s economic growth with the NSO expecting that the real gross value added in the Indian manufacturing sector in FY 2019-20 will rise by only 2 percent year-on-year, noted Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit. The construction sector is also expected to record a significant deceleration, with real GVA likely to grow 3.2 percent year-on-year in FY 2019-20.

“The services sector is also expected to remain resilient, with trade, hotels, transport and communications GVA is estimated to grow at 5.9 percent y/y in 2019-20, moderating slightly from the 6.9 percent y/y rate in 2018-19 but still robust. Financial, real estate and professional services GVA is expected to moderate from a pace of 7.4 percent y/y in 2018-19 to 6.4 percent y/y in 2019-20”, stated Rajiv Biswas.

The Reserve Bank of India eased policy rates considerably in 2019, in response to the deceleration of economic growth, with a series of rate cuts since February 2019. Meanwhile, the Indian government announced a large reduction in corporate tax rates in September 2019 to aid in stimulating new investment spending.

The Brent crude oil prices has risen sharply in the initial days of 2020, given the considerably rise in geopolitical tensions in the Middle East, following the U.S. drone strike. Indian is heavily dependent on imported crude oil and therefore a rise in global oil prices might pose a considerable risk to the Indian inflation outlook and to the current account deficit. This might also thwart RBI plans for additional monetary policy easing measures, at least in the near term.

Moreover, finanfial sector fragilities continue to be a drag on India’s economic growth momentum with the high level of non-performing loans on the balance sheets of the public sector banks, constraining their new lending.

“Consequently, IHS Markit forecasts that Indian real GDP growth in FY 2019-20 is expected to be 4.8 percent, as it is anticipated that the impact of fiscal and monetary policy stimulus measures will take time to filter through to the real economy”, added Rajiv Biswas.