DBS sees slow recovery for Indian economy, cuts GDP growth forecast to 5%

Weak growth has impacted revenue growth, compounding worries over an already weaker run-rate for tax revenues: DBS report.

Singapore's DBS Banking group has cut India's GDP growth forecast for this fiscal to 5 per cent from 5.5 per cent earlier and said that it will be a "slow climb to recovery" for the economy.

The financial services major said India's economy sharply decelerated this year as the financial sector reported stress.

"This slowdown is driven by an interplay of factors. This is part cyclical and part structural, which points to the likelihood of a slow climb to recovery in 2020," DBS in its report titled 'India annual outlook 2020' noted.

The Indian economy grew at the slowest pace in over six year at 4.5 per cent during the second quarter of the current fiscal. The GDP growth remained at 5 per cent in the first quarter ended June.

"Our GDP Nowcast model suggests growth ended 2019 on a somber note. With more high-frequency indicators surprising on the downside, we dial down our FY20 real GDP growth to 5 per cent year-on-year (previously 5.5 per cent), with the likelihood of two quarters of sub-5 per cent growth and inching up past 5 per cent in first half 2020," the report noted.

Favourable base effects, easier monetary conditions could support demand and while global conditions stabilise at lows. DBS has pegged FY21 GDP growth at 5.8 per cent year-on-year.

The report said that demand-supportive measures are expected in February's Budget, which should help growth in the short-term. Resumption of government spending coupled by inventory restocking is expected to help production, while non-financial sectors underpin services output.

"We remain hopeful of three-pronged support – monetary, fiscal and macro policies," it said.

Weak growth has impacted revenue growth, compounding worries over an already weaker run-rate for tax revenues, the report said adding that macro policies will also be important to draw in foreign capital – investments and portfolio flows.

Following government in the first term, DBS expects smooth implementation to be in focus in the first part of the government's second term, including simplifying the GST mechanism, strengthening the banking/ non-bank sector and tightening the bankruptcy law.

Near-term priority would be to shore up growth, initially by boosting demand by fiscal means and thereafter by addressing structural constraints.

On the monetary policy front, the report said the Reserve Bank of India is expected to further lower rates by another 50 bps by March 2020 after the total 110 bps delivered since February.

RBI has been on an aggressive easing spree but “we suspect that room to cut rates has become more limited into FY21", said the bank.