Asian Development Bank Cuts India GDP Forecast, While S&P Warns Of Ratings Downgrade

The Asian Development Bank downgraded its forecast for India’s economic growth in the current fiscal year from 6.5% to 5.1% Wednesday, citing weakening consumption, slow job growth and a poor harvest in the rural economy.

The bank also said domestic demand has weakened substantially since late 2018.

“In India growth has slowed substantially as a result of a credit crunch and weakening domestic demand,” the bank said.

Having already slowed year-over-year from 5.8% in fourth quarter of fiscal 2018 to 5% in first quarter of fiscal 2019, growth in India again fell even further to 4.5% in the second quarter of fiscal 2019, the lowest such quarterly rate since the last quarter of fiscal 2012, the report noted.

However, the bank predicted growth "should pick up to 6.5% in fiscal year 2020 with supportive policies.” In September, the bank said India’s gross domestic product would grow by 7.2% in 2020.

“Some tentative signs have emerged that the Indian economy is stabilizing in the second half of 2019,” the report said. “Growth is expected to benefit from government policy measures in recent months, notably a corporate tax cut, divestment from some state-owned enterprises, capital injections into public banks, and policy rate reduction by a total of 135 basis points, with further measures possible in the coming months,” the bank added.

Low oil prices, and a weakening rupee are also expected to support growth in fiscal 2020, the bank noted.

Last week, India’s central bank, the Reserve Bank of India, reduced its own gross domestic forecast for India’s to 5% from 6.1%, citing weak domestic and external demand.

Meanwhile, U.S. ratings agency Standard & Poor’s said it may cut India’s sovereign rating due to economic growth concerns.

S&P currently has a BBB- sovereign rating on India.

"We are forecasting real [gross domestic product] growth to decelerate to 5.1% in [fiscal 2020]," it said.

However, the rating agency affirmed that India's long-term economic outperformance remains intact.

After S&P’s warning, India’s 10-year bond yield closed more than 4 basis points higher to 6.763% -- the highest level since late September.

Expectations of an economic slowdown in India have been cited by many other observers and entities. IHS Markit recently forecast India's real GDP growth for fiscal 2020 will fall below 5%, saying stimulus measures will take some time to filter into the economy.

"Financial sector fragilities continue to weigh on India's economic growth momentum, with the high level of nonperforming loans on the balance sheets of the public sector banks, constraining their new lending," IHS stated.

The Reserve Bank of India has been cutting interest rates since February, while the government reduced corporate tax rates in September in response to the slowdown.

But regarding the ease in policy, IHS remains cautious.

"Although the [ Reserve Bank of India ] has also provided monetary policy stimulus through its monetary policy easing measures, the impact is likely to be more protracted, since monetary policy stimulus effects on the real economy generally act with long lags,” IHS said. “Furthermore, the impaired balance sheets of many public sector banks and [non-banking financial companies] also will dilute the flow-through of monetary policy easing to the economy.”

Confronted with the sharp slowdown in economic growth momentum, IHS warned, the Indian government will “face increasing pressure to roll out additional fiscal measures to bolster manufacturing output and kick-start an upturn in the investment cycle.” Such measures, IHS suggested, could include “accelerated government spending on infrastructure projects such as roads, railways, and ports, as well as urban infrastructure such as affordable housing and hospitals.”

IHS also said that India's financial sector problems will probably dampen economic growth over the medium-term.

"Furthermore, any turnaround in the investment cycle could also be relatively protracted, depending on the ability of the government to accelerate its own infrastructure spending program," IHS added.