Amid the corona virus pandemic, while recognizing the “central bank announced a broad set of policy measures to ease the economic shock ..”, Moody’s cuts India’s GDP growth outlook for this year to 2.5%.
In a recent press conference, RBI announced a series of liquidity measures to combat the economic impact because of the corona virus. Acknowledging these measures, the report further added, “While the measures will reduce the economic damage, we expect that the lockdown, which could be prolonged, and ongoing stress in the financial system will cause a sharp decline in India’s growth, potentially exacerbating fiscal pressures.”
In reference to the financial stimulus package announced by FM Nirmala Sitharaman, the report said, “we expect the emergency fiscal package to contribute to slippage from the central government’s budgeted deficit target of 3.5% of GDP for the fiscal year ending March 2021. At this stage, we expect the increased expenditure, combined with weaker overall revenue and disinvestment receipts, to drive the central government’s deficit to around 5.0% of GDP. ”
Considering the lockdown imposed in the country, the ” we expect consumption – which contributes around 60% of India’s economic output – to decline sharply. Financial stress among rural households and weak job creation over the course of the last couple of years have already weighed significantly on consumption. Liquidity constraints faced by some non-bank financial institutions (NBFIs) have also exacerbated negative pressures on households’ budgets through a slowdown in credit growth to finance retail purchases”.
The report acknowledged the measures [RBI and Fiscal package] will help to address concerns over cash and food shortages, but are likely to provide minimal support for growth, given the very large size of the shock. We therefore expect that this will be the first in a series of fiscal support measures by the government to help mitigate the hit to the economy. And considering all these things, Moody’s predicted economic activity to begin to slowly normalize by the third quarter of 2020. However, due to its expectation that output will contract sharply in the second quarter, Moody’s have reduced our real GDP growth forecast for India for 2020 to 2.5% from 5.3%. The report further added “Given the possibility of further spread of the virus and extension of the lockdown period, there is significant downside risk to our forecast.”
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