With the Indian economy caught in crosswinds, we now expect gross domestic product (GDP) to grow 6.9% this fiscal, or 20 basis points lower than what we had envisaged earlier.
The revision factors in a triangulation of downside risks: inadequate monsoon, slowing global growth, and sluggish high-frequency data for the first quarter.
The slowdown would be pronounced in the first half, while the second half should find support from monetary easing, consumption and statistical low-base effect.
Agricultural terms of trade are also expected to improve with a pick-up in food inflation. In addition, farmers would benefit from income transfer of Rs 6,000 per year announced by the Centre, and farm loan waivers in a few states.
Policy action looks attuned to consumption than investment demand, which means consumption will be the first to ascend as the tide turns.
But all that might not be enough to pitchfork growth this fiscal to, or above, the past 14-year average of 7% per annum.
So what is behind the slackening?
GDP grew at an impressive 8.2% in fiscal 2017, the fastest in a decade. Then a cyclical downturn got triggered because of disruptions wrought by policy initiatives and reforms, and rising global uncertainty stemming from trade disputes.
Weak global growth and falling trade intensity shrank India’s overall exports pie, and a gradual pick-up in crude oil prices fanned further headwinds. The rollout of Goods and Services Tax (GST) also had a knock-on effect on exports growth in the year of implementation because of delay in refunds to exporters.
Simultaneously, the farm front continued to flounder. Terms of trade for agriculture deteriorated in fiscals 2018 and 2019, and weak wage growth further affected rural incomes.
In all that time, public sector banking also remained incapacitated, primarily because of rising bad loans.
The onset of the non-banking financial company (NBFC) crisis in September 2018 aggravated the situation. Given that NBFC penetration is high in certain household consumption segments, the stress that ensued further impacted demand.