FocusEconomics Consensus Forecasts India

India Economic Outlook

Outlook deteriorates further

India’s economic outlook has deteriorated markedly in recent months, with our panel of leading forecasters now expecting a 5.0% contraction in fiscal year 2020 (April 2020 to March 2021) due to sharp projected falls in private consumption, fixed investment and exports.

While the strict nationwide lockdown implemented in March has now been lifted, the virus continues to spread rapidly across the country, necessitating sporadic localized restrictions which are holding back activity. Coronavirus is also compounding underlying structural problems, including creaking infrastructure, weaknesses in the banking sector and a lackluster pace of reform. 

The most recent data points to meager momentum heading into Q2 of the fiscal year: Both the manufacturing and services PMIs remained deep in contractionary territory in July. This comes after the 15.1% annual decline in GDP expected in April-June. 

The economy’s weakness has been exacerbated by tepid fiscal support compared to other emerging markets due to the government’s limited room for maneuver, which risks permanent harm to the economy. As Priyanka Kishore, head of India and South East Asia at Oxford Economics, comments:

“Short-term fiscal assistance continues to disappoint: it is now evident that the economic costs of the lockdown far outstrip the fiscal response so far. The scope for further assistance also appears limited, with Moody’s not only lowering India’s sovereign rating to Baa3, but also maintaining a negative outlook for the country, along with Fitch. The authorities are likely to be much more mindful of the fiscal deficit now.” 

Prakash Sakpal, senior Asia economist at ING, takes a similar view: 

“In May, the government unveiled a big-bang in the form of an INR 20 trillion (10% GDP equivalent) stimulus package. However, the real fiscal thrust in this was meagre, about 2.6% of GDP. The rest was fluff, including structural reforms in critical sectors. That’s helpful over the longer-term, but doesn’t provide much immediate help for the economy.” 

As a result, it has fallen to monetary policy to pick up the slack. The Reserve Bank of India has reduced its repurchase rate by 115 basis points since the start of the year and implemented a host of other initiatives to boost liquidity. On one hand, the moves have lowered debt servicing costs for the government, and likely helped keep some firms afloat. However, lower rates have had little success at boosting lending so far due to subdued demand for loans, while elevated inflation—linked to higher food prices and tax hikes—is limiting the Bank’s ability to cut further and faster. 

Looking ahead though, our panelists do see further rate cuts by year-end, as the RBI’s desire to support the ailing economy trumps concerns over inflation. As analysts at Nomura state: 

“We expect growth to sequentially disappoint as rising infection cases have resulted in flattening of the mobility curve since mid-June and the current surge in inflation, we believe, is likely to be transitory. Meanwhile, market concerns surrounding financial stability are likely to weigh on medium-term growth. Hence, we continue to expect a cumulative 50bp in rate cuts in Q4 2020.”

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Easy to read reports, short recommendations and robust conclusions. Clear link between numbers, comments and trends."
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Pfizer
Easy to read reports, short recommendations and robust conclusions. Clear link between numbers, comments and trends."
Tax Lead
Pfizer

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India’s economic outlook has deteriorated markedly in recent months, with our panel of leading forecasters now expecting a 5.0% contraction in fiscal year 2020 (April 2020 to March 2021) due to sharp projected falls in private consumption, fixed investment and exports.

While the strict nationwide lockdown implemented in March has now been lifted, the virus continues to spread rapidly across the country, necessitating sporadic localized restrictions which are holding back activity. Coronavirus is also compounding underlying structural problems, including creaking infrastructure, weaknesses in the banking sector and a lackluster pace of reform. 

The most recent data points to meager momentum heading into Q2 of the fiscal year: Both the manufacturing and services PMIs remained deep in contractionary territory in July. This comes after the 15.1% annual decline in GDP expected in April-June. 

The economy’s weakness has been exacerbated by tepid fiscal support compared to other emerging markets due to the government’s limited room for maneuver, which risks permanent harm to the economy. As Priyanka Kishore, head of India and South East Asia at Oxford Economics, comments:

“Short-term fiscal assistance continues to disappoint: it is now evident that the economic costs of the lockdown far outstrip the fiscal response so far. The scope for further assistance also appears limited, with Moody’s not only lowering India’s sovereign rating to Baa3, but also maintaining a negative outlook for the country, along with Fitch. The authorities are likely to be much more mindful of the fiscal deficit now.” 

Prakash Sakpal, senior Asia economist at ING, takes a similar view: 

“In May, the government unveiled a big-bang in the form of an INR 20 trillion (10% GDP equivalent) stimulus package. However, the real fiscal thrust in this was meagre, about 2.6% of GDP. The rest was fluff, including structural reforms in critical sectors. That’s helpful over the longer-term, but doesn’t provide much immediate help for the economy.” 

As a result, it has fallen to monetary policy to pick up the slack. The Reserve Bank of India has reduced its repurchase rate by 115 basis points since the start of the year and implemented a host of other initiatives to boost liquidity. On one hand, the moves have lowered debt servicing costs for the government, and likely helped keep some firms afloat. However, lower rates have had little success at boosting lending so far due to subdued demand for loans, while elevated inflation—linked to higher food prices and tax hikes—is limiting the Bank’s ability to cut further and faster. 

Looking ahead though, our panelists do see further rate cuts by year-end, as the RBI’s desire to support the ailing economy trumps concerns over inflation. As analysts at Nomura state: 

“We expect growth to sequentially disappoint as rising infection cases have resulted in flattening of the mobility curve since mid-June and the current surge in inflation, we believe, is likely to be transitory. Meanwhile, market concerns surrounding financial stability are likely to weigh on medium-term growth. Hence, we continue to expect a cumulative 50bp in rate cuts in Q4 2020.”

Download the full report

Fill in the short form below to receive a free copy of our latest Consensus Forecast report for India.

Easy to read reports, short recommendations and robust conclusions. Clear link between numbers, comments and trends."
Tax Lead
Pfizer

Watch the video

Play Video

FocusEconomics is a leading provider of economic consensus forecasts for 131 countries and 34 commodities. Since 1999, we have been supporting the world's leading companies and institutions with timely and reliable economic intelligence.

FocusEconomics is a leading provider of economic consensus forecasts for 131 countries and 34 commodities. Since 1999, we have been supporting the world's leading companies and institutions with timely and reliable economic intelligence.

FocusEconomics is a leading provider of economic consensus forecasts for 131 countries and 34 commodities. Since 1999, we have been supporting the world's leading companies and institutions with timely and reliable economic intelligence.

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