Moody's Cuts India's 2020 Growth Forecast to 5.4% Amid Coronavirus Fears

With the virus continuing to spread, it is still too early to make a final assessment of the impact on China (A1 stable) and the global economy.

Global rating agency Moody’s said on Monday that India’s economic recovery is likely to be shallow and expand at a lower pace of 5.4% in calendar year 2020 than the earlier estimate of 6.6%.

In a review of the global economy to asses likely to impact on the coronavirus outbreak, Moody’s said it (virus and its spread) has diminished optimism about prospects of an incipient stabilisation of global growth this year.

With the virus continuing to spread, it is still too early to make a final assessment of the impact on China (A1 stable) and the global economy.

India’s economy has decelerated rapidly over the last two years. the real gross domestic product grew at a meagre 4.5% the third quarter of calendar Q3 2019. Improvements in the latest high-frequency indicators such as PMI data suggest that the economy may have stabilised.

Moody’s said, “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, the revised forecasts for growth of the Indian economy are 5.8% for 2021 (as against previous projection of 6.7% for 2021).

A key to stronger economic momentum would be the revival of domestic demand, both rural and urban, in India. But equally important is the resumption of credit growth in the economy.

As data from the Reserve Bank of India (RBI) shows, credit impulse has deteriorated throughout the last year due to 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 percent in nominal terms in December 2019, down sharply from 12.8% a year earlier.

The deterioration in credit growth to the commercial sector is particularly stark. Nominal credit to industry grew at only 1.6% year-on-year in December 2019, while credit to the services sector registered 6.2% nominal growth, and credit to agriculture and related activities grew 5.3%.

It revised global GDP growth forecast down and expects G-20 economies to collectively grow 2.4% in 2020, a softer rate than last year, followed by a pickup to 2.8% in 2021.

Moody’s said its baseline scenario assumes that the outbreak will cause disruption in Q1 economic activity. The spread of the coronavirus will be contained by the end of Q1, allowing for the resumption of normal economic activity in Q2.

At present, China’s economy is by far the worst affected. However, the rest of the world also has exposure as a result of a hit to global tourism in the first half of this year and short-term disruptions to supply chains.

The effects on the global economy could compound if the rate of infection does not abate and the death toll continues to rise. The supply chain disruptions in manufacturing would become more acute the longer it takes to restore normalcy, it added.

By arrangement with Business Standard.