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Subdued private capex to pin down GDP growth at 7.5% next fiscal

SILVER LINING: But growth will be more dispersed and evenly balanced across sectors, says an India Ratings report

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Subdued private capex to pin down GDP growth at 7.5% next fiscal
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India's economic growth is likely to show only a slight improvement next financial year (FY) as compared to the current fiscal due to a slowdown in the capex from private corporates and households.

According to Fitch Group firm India Ratings and Research (Ind-Ra), the gross domestic product (GDP) is expected to grow at 7.5% in 2019-20, a tad higher than 7.2% in 2018-19.

Due to the slowdown in private corporate and household capex, the gross domestic product growth has failed to accelerate and sustain itself close to or in excess of 8%, the rating firm said on Thursday.

"If the government capex is stepped up, alone it will not be able to revive the capex cycle in the economy. In the last three-four years, the government is pumping money with increased capex. But all this has still not resulted in a situation where private corporate sector feels confident that it's time to invest," said Sunil Kumar Sinha, director, public finance at India Ratings.

However, GDP growth in FY20 will be more dispersed and evenly balanced across sectors as well as demand-side growth drivers, Ind-Ra said.

The rating company believes investments are slowly but steady gaining traction with gross fixed capital formation growing 12.2% in FY19 and projected to clock 10.3% in FY20. This is certainly a comforting development, but the flip side is that it is primarily driven by the government capex, as incremental private corporate capex is yet to revive.

An Ind-Ra study of top 200 listed and unlisted non-financial asset-heavy corporates suggests that private sector capex is unlikely to revive before FY21.

"The chances of a meaningful private sector capex improving going forward in FY20 are still low. We believe private capex will start from FY21 because capacity utilisation is in 70-75% range. That is the major deterrent to private sector capex on a sustainable basis," said Davendra Kumar Pant, chief economist, public finance at Ind-Ra.

In 2018-19, "though the recovery has been sharp post demonetisation and Goods and Service Tax (GST) implementation, GDP growth would have been even better but for the global headwinds caused by an abrupt rise in crude oil prices and strengthening of the dollar. On the domestic front, hiccups were faced due to frequent revisions in GST rates, continued agrarian distress, slow progress on Insolvency and Bankruptcy Code (IBC) cases, liquidity crunch faced by non-banking finance companies post IL&FS saga," India Ratings said in a note.

Like FY19, the Ind-Ra expects all major sectors, namely, agriculture, industry and services to contribute to gross value added (GVA) growth in FY20 from the supply side. However, a key support to the GVA growth is expected to come from services, followed by industry and they are expected to grow at 8.3% and 7.4%, respectively, in FY20. Under normal monsoons, agricultural GVA is expected to grow at 3.0%. All this would translate into overall GVA growth of 7.3% in FY20 compared to 7.0% in FY19.

The pressure on wholesale and retail inflation is likely to remain benign in the coming fiscal year, subject to normal monsoons and Indian crude oil basket averaging about $55/barrel.

India Ratings expects wholesale and retail inflation to average 3.4% and 4.3%, respectively, in FY20. This may prompt the Reserve Bank of India to change its policy stance from calibrated tightening to neutral in the February 2019 monetary review, but the firm believes a rate cut will happen in FY20.

India Ratings expects slippage on the fiscal front, with fiscal deficit rising to 3.5% of GDP in FY19 instead of the budgeted 3.3%. If the government announces a fiscal package for distressed farmers in the FY20 Budget or Universal Basic Income (UBI), this will push the fiscal deficit of the central government by 72 basis points in FY20.

The current account deficit (CAD) is likely to decline to 1.9% of GDP in FY20 from 2.4% of GDP, helped by softening of crude oil prices in FY19.

On the rupee front, "we are expecting capital inflows to be in the surplus level rather than outflows. This will help rupee to average 71.36 against the US dollar in FY20," said Pant.

Even capital account is expected to record a surplus supported by foreign direct investments, foreign portfolio investments and banking capital inflows, Ind-Ra

AT A SLOW PACE

  • Investments gaining traction with gross fixed capital formation growing 12.2% in FY19 and projected to clock 10.3% in FY20
     
  • But the flip side is that it is primarily driven by the government capex, as incremental private corporate capex is yet to revive
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