Pronounced slowdown is on account of multiple, domestic and long-lasting factors Moody's slashes India FY'20 GDP growth forecast to 5.8%

US rating multinational Moodys Investor Services on Thursday cut its 2019-20 growth forecast for India to 5.8%, from its earlier 6.8%, saying the economy was experiencing a pronounced slowdown on account of multiple, domestic and long-lasting factors.

"While we expect a moderate pickup in real GDP growth and inflation over the next two years supported by monetary and fiscal stimulus, we have revised down our projections for both, a Moody's report said.

"We forecast real GDP growth to decline to 5.8% in the fiscal year ending March 2020 (fiscal 2019) from 6.8% in fiscal 2018, and to pick up to 6.6% in fiscal 2020 and around 7.0% over the medium term. Compared with only two years ago, the probability of sustained real GDP growth at or above 8% has significantly diminished," it said.

"India (Baa2 stable) is experiencing a pronounced slowdown in economic growth which we assess to be partly related to long-lasting factors. Prolonged softer growth would dampen prospects for the government's fiscal consolidation plans and hamper its ability to prevent a rise in the debt burdens. Given India's already weak fiscal position, this would weigh on thesovereign credit profile," it added.

According to the American agency, India's growth will remain weaker than in the recent past

At 5.0% year on year in the April-June quarter of 2019, India's real GDP growth has slowed markedly. The drivers of the deceleration are multiple, Moody's said.

What was an investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation.

A credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem.

Moody's also pointed that the prospects for fiscal consolidation look limited but rapid deterioration is also unlikely.

"With the recently announced corporate tax cuts and lower nominal GDP growth, we now expect a central government deficit of 3.7% of GDP in fiscal 2019, marking a 0.4 percentage point slippage from its target," it said.

"A prolonged period of slower nominal GDP growth not only constrains scope for fiscal consolidation, but also keeps the government debt burden higher for longer compared with our previous expectations. Based on our debt sensitivity analysis, under nominal growth of around 11%, close to our baseline assumption, the debt burden will remain broadly stable at around 68% of GDP, and decline slightly toward 66% by 2023.