India may see shallow recovery by 2020

15 September, 2019 12:00 AM printer

MUMBAI: India's slowing economy may see shallow recovery by early 2020, a Mumbai-based economist of Bank of America Merrill Lynch has said.

"We see the current Indian slowdown -- not a crisis under any circumstances - as cyclical. Its genesis lies in the liquidity crunch of 2018," Indranil Sen Gupta, economist of Bank of America Merrill Lynch (BofAML) told Xinhua on Thursday.

With India's central bank -- the Reserve Bank of India and the Ministry of Finance taking several measures to bring down lending rates since December, "We expect to see a shallow recovery by early 2020," said the economist, who had a decade-long stint at India's central bank as a staff economist before joining a private Indian bank and later his current role.

India's economy grew by meager 5 percent -- the slowest in six years in April-June quarter compared to 5.8 percent in the preceding quarter, as per the official data.

The subdued growth had put pressure on the Modi government to revive the economy's growth trajectory, leading to merger of multiple public sector banks in the country to improve liquidity and efficiency in lending.

The slowing down had a multiplier effect on India's automobile sector among other sectors, which reported the 10th consecutive month of decline in August in the passenger vehicle segment, down 31.57 percent to 196,524 units.

According to Sen Gupta, there is scope for a fiscal stimulus of 20 basis points of GDP without stoking bond yields and reducing the scope for bank lending rate cuts.

India's 10-year bond yield in the domestic market now hovers 6.68 percent from 8.18 percent following a cumulative 110 basis points policy rate cut by the Reserve Bank of India on four occasions this year.

However, despite the rate cut, credit off-take has not picked up. As per the country's central bank, non-food bank credit growth in June had moderated to a 10-month low of 11.1 percent in June this year.

But the Modi government has, time and again, demonstrated its commitment to fiscal prudence, Sen Gupta said.

Media reports have aired apprehensions that the slowing growth could impact the tax collections and force the government to raise its fiscal deficit target to 3.5 percent of GDP from the set target of 3.3 percent.

Commenting on the fallout of the global trade tensions, Sen Gupta said, "It impacts India less than others as it is essentially a domestic demand driven economy. However, it does affect activity through financial markets as Foreign Portfolio Investment (FPI) flows dry up at times of global uncertainty."

The shallow recovery to 6.8 percent in 2020-21 (April-March) should be seen with above-normal rainfall for agriculture from projected 6.2 percent in 2019-20, he said.

Apart from improved rainfall, the fading base effect and lending rates cuts triggered by measures initiated by the Reserve Bank of India and the Indian government could contribute to growth revival, Sen Gupta said.