Indian real GDP growth in the 2019 - 2020 financial year is estimated to moderate to a pace of 5.0 percent year on year - Photo by Prime Minister Office

JAKARTA (TheInsiderStories) – Indian real GDP growth in the 2019 – 2020 financial year is estimated to moderate to a pace of 5.0 percent year on year (YoY), significantly lower than the 6.8 percent growth rate recorded in the 2018 – 2019 financial year, according to the National Statistical Office (NSO). This would be the lowest pace of GDP growth in India for a full financial year since the global financial crisis in 2008 – 2009.

A key factor driving the sharp slowdown in Indian economic growth is the manufacturing sector slump, with the NSO estimating that real gross value added (GVA) in the Indian manufacturing sector in 2019 – 2020 will increase by just 2.0 percent in annual basis, compared with growth of 6.9 percent in 2018 – 2019.

A significant slowdown is also estimated for the construction sector, with real GVA estimated to rise 3.2 percent (YoY) during 2019 – 2020, compared with 8.7 percent in previous year. However, the performance of other sectors of the Indian economy are estimated to be more resilient, with agriculture, fishing and forestry GVA estimated to grow at a pace of 2.8 percent in this year, similar to the 2.9 rate recorded in 2018 – 2019.

The services sector is also expected to remain resilient, with trade, hotels, transport and communications GVA is estimated to grow at 5.9 percent in 2019 – 2020, moderating slightly from the 6.9 percent rate in 2018 – 2019, but still robust. Financial, real estate and professional services GVA is expected to moderate from a pace of 7.4 percent in prior period to 6.4 percent in the recent year.

In response to the slowdown in Indian economic growth, the Reserve Bank of India has eased policy rates significantly during 2019, with a series of rate cuts since February 2019, while the Indian government announced a large reduction in corporate tax rates in September 2019 in order to help boost new investment spending.

Indian Finance Minister Nirmala Sitharaman has also stated that India will spend US$1.4 trillion on infrastructure construction over the next five years, with the Indian government planning to intensify the use of public-private partnerships as well as real estate investment trusts and infrastructure investment trusts to mobilize greater infrastructure financing.

However, the significant escalation in geopolitical tensions in the Middle East, following the US drone strike that killed Iran’ commander Qasem Soleimani, followed by Iran launching of more than a dozen ballistic missiles against US military and coalition forces in Iraq at Al-Assad and Irbil bases, has already pushed up Brent crude oil prices sharply in the first few days of 2020.

Since India is highly dependent on imported crude oil, a large and sustained rise in world oil prices would pose a significant risk to the Indian inflation outlook as well as to the current account deficit, and could thwart RBI plans for further monetary policy easing measures, at least in the near term.

Furthermore, financial sector fragilities continue to weigh on India’ economic growth momentum, with the high level of non-performing loans on the balance sheets of the public sector banks, constraining their new lending. There are also risks from potential contagion effects from troubled non-bank financial companies to the balance sheets of some commercial banks, which could further weigh on the overall pace of credit expansion.

Consequently, Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit, forecasts that Indian real GDP growth in this year is expected to be 4.8 percent, as it is anticipated that the impact of fiscal and monetary policy stimulus measures will take time to filter through to the real economy.

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