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RBI's downgrading of FY20 growth means the $5 trillion GDP goal may have to wait longer

RBI has revised growth forecasts to 4.9-5.5% for H2 of this fiscal and 5.9-6.3% for H1 2020-21.

ET Online|
Updated: Dec 05, 2019, 03.27 PM IST
Experts feel that there will be a pick up in the coming quarters on the back of steps taken by the government.
The Reserve Bank of India has once again downgraded the growth forecast to 5 per cent in its fifth bi-monthly policy from 6.1 per cent two months ago. It has revised the growth to 4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1 2020-21.

While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks.

The third revision of the full year economic growth estimate by the RBI comes in the backdrop of the second quarter GDP growth falling to 4.5 per cent from 5 per cent in the first quarter.

Second quarter GVA was reported at 4.3 per cent.

Experts feel that there will be a pick up in the coming quarters on the back of steps taken by the government in the form of infrastructural boost, corporate tax cut, liberalising FDI, ensuring flow of credit to non-banks and more capital infusion. However, the ultimate outcome is yet to be achieved in terms of real time growth.

A 12 percent nominal growth was required to achieve the $5 trillion economy by 2024-25. However, with economy growing at 6.1 per cent which is almost as half the estimation, it has become more challenging to accomplish the set target.

Almost all lead indicators for the second quarter painted a picture of gloom. The index of industrial production showed contraction in the months of August and September, led by contraction in the manufacturing and capital goods sector.

The investment rate in the economy measured by Gross Fixed Capital Formation (GFCF) collapsed to just 1 per cent in the second quarter from 11.8 per cent in the same period last year.

The government has undertaken a number of measures to revive investments. In September, it announced a cut in the corporate tax rate to 22 per cent from 30 per cent. It also lowered the tax rate for new manufacturing companies to 15 per cent to attract new foreign direct investments.


Revisions in the growth forecast for FY20 by various rating agencies:-
Rating agency Crisil sharply cut its growth forecast for the current financial year to 5.1 per cent from an earlier estimate of 6.3 per cent.

The current fiscal year forecasts by Nomura has massively cut its GDP forecast to a low 4.9 per cent for the year from 5.7 per cent earlier, saying the economy is going through a "deeper trough" and even a sub-par recovery is at least a year away.

"India Ratings and Research has revised its GDP growth forecast for FY20 to 5.6 per cent. This is the fourth revision and has come in after the agency had revised its FY20 GDP growth forecast only a month ago to 6.1 per cent," the rating agency said in a statement.

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