With the Indian economy caught in crosswinds, Crisil now expects the gross domestic product (GDP) to grow 6.9 percent this fiscal, or 20 basis points lower than its earlier estimate, the agency said in its latest report.

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According to Crisil, 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, it added.

However, 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 percent per annum, as per Crisil.

GDP fell to 5 percent in the first quarter of fiscal 2020. In the last seven fiscals, there have been seven instances when quarterly GDP growth fell below 6 percent.

So what is behind the slackening growth?

GDP grew at an impressive 8.2 percent 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. The public sector banking also remained incapacitated, primarily because of rising bad loans," Crisil noted.

Meanwhile, 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 further impacted demand.

The rating agency explained that with access to funding becoming challenging and NBFCs caught up in managing liquidity, their growth halved to a multi-year low in the second half of last fiscal, and remains impacted. On the bright-side, the report said that the banking sector's non-performing assets (NPAs) are expected to decline to around 8 percent by March 2020, given lower accretion and increased recoveries.

Credit growth should also grind up to 14 percent, the highest in five fiscals. Seasoning of retail portfolio and performance of the small and medium enterprise (SME) portfolio after the restructuring period will be the key monitorables, it added.

Growth for NBFCs, mainly in the retail segment, is also expected to pick up gradually. Also, NBFCs have used this opportunity to correct their asset-liability mismatches, and have reduced reliance on short-term market borrowings, which is a structural positive for the sector. However, at the same time, funding access has not normalised for the sector, and asset quality risks in the wholesale book, especially developer funding, have increased, the report stated.

It also explained that most consumption segments will pull revenue growth into single-digit this fiscal, while, weak prices of commodities such as steel and crude oil would exacerbate the pain. As for industrial capex, it would remain moderate given the weak demand. Over the past few years, infrastructure investments (including public and private) have driven capex. But over the next three years, lower spending, such as on roads, is expected to drag growth in infrastructure investments to 6 percent compound annual growth rate (CAGR) over the next three fiscals as compared to 10 percent in the last three fiscals.

Given the fiscal constraints, public spending is unlikely to have the heft to pull growth above 7 percent. And some of the recent, and much-needed reforms would pay off only over the medium term. There would, therefore, be some near-term onus on monetary policy to stimulate growth. But how effective that can be is the big question, added Crisil.

First Published:Sept 19, 2019 10:28 AM IST