India’s economy in the July-September quarter is expected to decelerate to 4.2%, a State Bank of India report released early today said, giving out the lowest of all projections among the state-owned agencies and banks.
The largest PSU lender also cut the full-year forecast for 2019-20 to 5% from an earlier 6.1%.
So far only Nomura has projected the September quarter GDP growth at 4.2%, down from 5% in the June quarter.
The downgrade in SBI’s projection comes after a 4.3% contraction in India’s industrial production in September, which the lender termed as “quite alarming”. “We expect the Q2 GDP growth at 4.2%. Our acceleration rate for 33 leading indicators at 85% in October 2018 is down to just 17% in September 2019. Even the IIP growth number in September was -4.3%, which is quite alarming. We are revising our GDP forecast for FY20 to 5%,” the SBI research report Ecowrap said Tuesday.
It, however, expected the GDP growth rate to pick up pace to 6.2% in 2020-21.
The report said that India’s slowdown in the current year should be looked through the prism of synchronized global growth slowdown. The bank, though, expected a larger interest rate cut by the Reserve Bank of India (RBI) in its December monetary policy, it said such rate cut would unlikely lead to any immediate material revival.
The author of the report and SBI chief economist Soumya Kanti Ghosh said that a rate cut by RBI might result in potential financial instability as debt-financed consumption against an increasing household leverage had not worked in countries and India could not be an exception. In this case, he said, the role of fiscal policy was of paramount importance. Any reluctance to use the fiscal policy tool thinking that the monetary space was still adequate, could be counterproductive.
In SBI’s view, markets were not unduly worried about any fiscal deficit but were awaiting a clarity from the government on the extent of fiscal slippage in FY20. The Asia’s third-largest economy is currently hit by a consumption slowdown, where private consumption, investments and even exports have taken a hit.