Moody's cuts India's GDP growth forecast to 5.6%

After cutting India's sovereign ratings recently, Moody's Investor Services on Thursday also cut India's growth forecast to 5.6% for the calendar year 2019 for reasons of subdued consumer demand, along with sluggish liquidity supply.

The US ratings multinational revised downwards its growth forecast for India to 5.6% in 2019, from 7.4% in 2018.

"We expect economic activity to pick up in 2020 and 2021 to 6.6% and 6.7%, respectively, but the pace to remain lower than in the recent past," Moody's said in Global Macro Outlook 2020-21.

"India's economic growth has decelerated since mid-2018, with real GDP growth slipping from nearly 8% to 5% in the second quarter of 2019 and joblessness rising."

In the current slowdown consumption demand has "cooled" notably, the ratings agency said.

Besides, the agency noted the government's measures like the cut in the corporate tax rate, bank recapitalisation, support for the auto sector and plans for infrastructure spending, among others, to arrest the growth slowdown.

"However, none of these measures directly address the widespread weakness in consumption demand, which has been the chief driver of the economy," Moody's Outlook report said.

On monetary policy, the ratings agency said that more rate cuts are "likely" on the back of benign domestic inflationary pressures and subdued oil prices.

However, transmission of lending rates continues to be hindered by the "credit squeeze" caused by disruption in the non-bank financial sector, it said.

"While our baseline forecasts assume that economic momentum will pick up, there are risks to the downside. Slow employment growth is weighing on consumption," the Outlook report said.

"The interest rate cutting cycle is not adequately being transmitted, which is hampering investment as companies' borrowing costs remain elevated."

Last week, Moody's had changed the outlook on India's sovereign ratings to negative from stable and affirmed the Baa2 foreign-currency and local currency long-term issuer ratings.

Moody's had also affirmed India's Baa2 local-currency senior unsecured rating and its P-2 other short-term local-currency rating.

India's credit rating at Baa2 is the second lowest investment rating and Moody's has warned that India could be heading towards a debt trap and recessionary phase.