Saying that the outlook for a spurt in consumption and private investment looks bleak in the short term, rating agency CRISIL has revised its growth estimate for 2019-20 (FY20) to 6.9 per cent, from its earlier estimate of 7.1 per cent.
But it also said that the current economic slowdown is not as bad as the one India went through in 2012-13 and 2013-14, but akin to that in 2009, when the recovery was quick.
The economy will pick up in the second half of the fiscal year, but will remain sluggish in the first half, it said in its report on the economic outlook.
After two years of poor growth in corporate profits but relatively better revenue growth, FY20 might show the opposite, with profit growth overtaking revenue growth, the report said.
Aviation and telecom sectors will contribute most to profitability growth, but revenue outlook would remain tepid in these sectors too, the report said.
The decline in auto sales has been the highlight of the recent quarters. Increased regulation, tightening liquidity due to the non-banking financial companies’ crisis, and moderating income growth have been the reasons, said CRISIL.
In addition to the auto sector crisis, the softening of commodity prices is affecting the metals sector, and a lack of thrust to export-intensive sectors from the overvalued currency is compounding worries.
Further, farm incomes stagnated in 2018, according to the agency, along with tepid growth in urban incomes as well. Projecting a below-normal rainfall — it has been lower than normal in initial months —it expects slowing farm incomes to get a fillip this time around.
The report said capital investment will be largely driven by public spending (spending by government and public enterprises) in the medium term, while the share of private investment in the overall mix will reduce. Steel and cement will drive capital investment in 2019, the report said.
Over the longer term, infrastructure investments have weakened as a proportion of the economy, and are likely to weaker further, projected CRISIL.
The instruments to mend the situation, however, are limited. Revenue prospects are a tall order, and the near-term onus is on the monetary policy. There have been three consecutive rate cuts in 2019, and the financial markets expect a cut in the August monetary policy meeting too.
It said the crisis in the non-banking space has affected real estate hard. Lending to the real estate is slated to remain weak in the coming months, and small- and mid-size developers will bear the brunt, it said.
Commenting on the action taken by the US Federal Reserve in the past few years, it said it expects one rate cut in calendar year 2019. The Fed did cut interest rates on July 31. External financial conditions will remain conducive to attracting foreign capital flows due to this, said CRISIL.