Moody's cuts growth forecast as India emerges fifth largest economy

IT was a bittersweet Monday (17) for India. While one report said India emerged as the world’s fifth largest economy by overtaking the UK and France in 2019, another slashed its growth projection for 2020.

The US-based independent think-tank World Population Review, in its report, said that India was developing into an open-market economy from its previous autarkic policies.

“India’s economy is the fifth largest in the world with a GDP of $2.94 trillion, overtaking the UK and France in 2019 to take the fifth spot,” it said.

The size of the UK economy is $2.83 trillion and that of France $2.71 trillion.

The report further said that in purchasing power parity (PPP) terms, India’s GDP (PPP) is $10.51 trillion, exceeding that of Japan and Germany. Due to India’s high population, India’s GDP per capita is $2,170 (for comparison, the US is $62,794).

India’s real GDP growth, however, it said is expected to weaken for the third straight year from 7.5 per cent to 5 per cent.

The report observed that India’s economic liberalisation began in the early 1990s and included industrial deregulation, reduced control on foreign trade and investment, and privatisation of state-owned enterprises.

“These measures have helped India accelerate economic growth,” it said.

India’s service sector is the fast-growing sector in the world accounting for 60 per cent of the economy and 28 per cent of employment, the report said, adding that manufacturing and agriculture are two other significant sectors of the economy.

Meanwhile, American rating agency Moody's Investors Service slashed India's growth forecast from 6.6 per cent to 5.4 per cent for 2020.

In its update on Global Macro Outlook, Moody's said India's economy has decelerated rapidly over the last two years and expects economic recovery to begin in the current quarter.

“We expect any recovery to be slower than we had previously expected. Accordingly, we have revised our growth forecasts to 5.4 per cent for 2020 and 5.8 per cent for 2021, down from our previous projections of 6.6 per cent and 6.7 per cent, respectively,” Moody's said.

The growth projections are based on calendar year and, as per its estimates, India clocked a GDP growth of 5 per cent in 2019.

With a weak economy and depressed credit growth reinforcing each other, Moody's said “it is difficult to envision a quick turnaround of either, even if economic deceleration may have troughed”.

On the fiscal front, it noted, the Union Budget 2020 did not contain a significant stimulus to address the demand slump.

“As similar policies in other countries have shown, tax cuts are unlikely to translate into higher consumer and business spending when risk aversion is high,” it said.

Moody's said it expected additional easing by the Reserve Bank of India. However, if the recent rise in CPI inflation, mainly as a result of higher food prices, is seen to have second-round effects, this would make it more challenging for the central bank to cut interest rates further, it added.

With regard to global growth, Moody's said the coronavirus outbreak has diminished optimism about prospects of an incipient stabilization of global growth this year.

Global GDP growth forecast has been revised down, and Moody's now expect G-20 economies to collectively grow 2.4 per cent in 2020, a softer rate than last year, followed by a pickup to 2.8 per cent in 2021.

“We have reduced our growth forecast for China to 5.2 per cent in 2020 and maintain our expectation of 5.7 per cent growth in 2021,” it added.