The slump in economic activity is likely to worsen in the coming months. State Bank of India expects GDP growth to decline to 4.2% in the second quarter of the current financial year. It has also lowered its GDP forecast for FY20 from 6.1% to 5%. In the first quarter, growth had fallen to a six-year low of 5%.
However, SBI expects growth to gain momentum in FY21 to 6.2%.
“Our acceleration rate for 33 leading indicators [which was] at 85% in October 2018 is down to just 17% in September 2019. Even IIP growth number for Sep’19 was -4.3%, which is quite alarming,” Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, said in a report dated 12 November.
The country’s largest public sector bank expects GDP to decline due to low auto sales, slow air traffic, absence of growth in core economic sectors, and muted investment in construction and infrastructure. Ghosh highlighted the need to fix issues affecting cash-strapped non-banking financial companies (NBFCs).
“We believe that given the crisis of confidence in the financial markets, the provision of central bank liquidity for NBFCs is necessary to ensure the stability of the financial system. With every passing day the risk increases that the not-so-better-rated NBFCs in their quest to achieve capital ratio could do it through deleveraging and reduction of their assets, thus prolonging the credit crunch,” Ghosh noted in the report.
The Reserve Bank of India has cut benchmark rates five times this year. However, lenders haven’t fully passed this on to their customers. The report suggests monetary policy may be less effective than fiscal policy in the current macro environment, as low interest rates cannot guarantee an increase in demand for investment, since that is largely a function of outlook and business confidence.
“We believe that the steps taken by the government should take time to permeate through the system. We also believe that rate cuts are unlikely to lead to any material revival, rather it could result in potential financial instability as debt financed consumption against an increasing household leverage has not worked in countries and India cannot be an exception,” cautioned Ghosh in the report.
