Moody's raises India's FY21 growth forecast to -10.6%

Moody's Investors Service on Thursday upped India's growth forecast to (-) 10.6 per cent for the current fiscal, from its earlier estimate of (-) 11.5 per cent saying the latest stimulus prioritises manufacturing and job creation, and shifts focus to longer-term growth.

Last week, the government announced a new fiscal package amounting to around Rs 2.7 lakh crore, which included production-linked incentive scheme for manufacturing units and enhanced credit guarantee programme for small businesses.

Moody's said the latest measures aim to increase the competitiveness of India's manufacturing sector and create jobs, while supporting infrastructure investment and is "credit positive" as it presents potential upside to growth forecasts.

"We have revised our real, inflation-adjusted GDP forecast for fiscal 2020 (April 2020-March 2021) to a 10.6 per cent contraction, from a 11.5 per cent drop previously," Moody's said.

In September, the global agency had projected Indian economy to contract 11.5 per cent this fiscal.

For fiscal 2021-22, India's growth is projected at 10.8 per cent, as against the previous estimate of 10.6 per cent, Moody's said adding that in the medium term the growth is likely to settle around 6 per cent. "The country's mixed track record on revenue-raising measures lowers prospects for fiscal policy-driven budget consolidation. A sustained increase in GDP growth would therefore likely be a major driver of any durable future fiscal consolidation," it said.

Moody's forecasts government debt to increase to 89.3 per cent of GDP in fiscal 2020 and decline to 87.5 per cent in fiscal 2021, from 72.2 per cent in fiscal 2019.

According to Moody's fiscal deficit would reach around 12 per cent of GDP, with some upside risk, in fiscal 2020 and narrowing to about 7 per cent of GDP over the medium term, still above the deficit of 6.5 per cent of GDP in 2019.

Moody's, however, said that consumer confidence in India remains relatively low amid a continued elevated number of daily new coronavirus cases, although this has come down from a peak in September.

"Stronger nominal GDP growth over the medium term would make it easier for India's government to address its weak fiscal position, which the coronavirus has exacerbated," Moody's said.

Earlier this month, Moody's had revised upwards the growth forecast for the calendar year 2020 to (-) 8.9 per cent, from (-) 9.6 per cent predicted earlier.

The government had last week provided incentives for new job creation, additional fertiliser subsidy, announced tax relief on select home sale deals, and expanded support for infrastructure investment, totalling to Rs 2.65 lakh crore.

This took the cumulative stimulus package announced since the lockdown to almost Rs 30 lakh crore, or 15 per cent of the Gross Domestic Product (GDP).

Among the new measures, the government has allocated Rs 1.5 lakh crore to extend the Production Linked Incentive (PLI) scheme across a further 10 sectors, including automotive and advanced cell chemistry manufacturers. Under the scheme, manufacturers in key sectors will receive incentives in the form of direct payments over five years.

"The scheme aims to increase the competitiveness of India's manufacturing sector, potentially reviving private investment, where year-on-year growth has been trending downward since the second quarter of 2018," Moody's said.

The government expects that the companies currently approved under the scheme will generate total production of more than Rs 10.5 lakh crore (5.5 per cent of GDP) over the next five years, of which 60 per cent would be exports.

"As countries have increasingly looked to greater diversification in their supply chains since the coronavirus pandemic, the timely introduction of these measures could boost India's manufacturing industry, which contributed around 15 per cent of GDP in 2019," Moody's said.

The latest stimulus package also targets job creation with a new wage subsidy scheme lasting until the end of June 2021.

Under this, the government will fund provident fund contributions for eligible new employees hired within a two-year period, starting in October, and cover the employer's contribution on top of the employee's contribution for companies with 1,000 employees or less. Eligibility is restricted to employees earning a monthly wage of less than Rs 15,000.

"The wage support provided to businesses and the push to scale up production under the PLI scheme could increase employment in India's persistently soft labour market," it added.

The government has additionally extended its emergency credit line guarantee scheme that it announced in May, providing full, collateral-free, guarantees on lending to small and medium-sized enterprises on up to 20 per cent of outstanding loans, by a further four months until March 2021.

The scheme has been widened to cover businesses in identified stress sectors which did not qualify initially, with outstanding credit on February 29, 2020 of up to Rs 500 crore. "This will boost credit flow, a key element in the economy's recovery," Moody's added.

Other global agencies Fitch Ratings and S&P projects India's economic contraction at 10.5 per cent and 9 per cent respectively. Last month the World Bank said India's economy is likely to grow (-) 9.6 per cent this fiscal, while IMF projected it at (-) 10.3 per cent in 2020.