Goldman Sachs Cuts India Forecast To 5.3% For FY20; Warns Of Fiscal Risks

Goldman Sachs has become the latest forecaster to pare down growth estimates for India, while warning of fiscal risks.

The research house expects India's GDP growth to slip to 5.3 percent for FY20 and adds that the slowdown in the economy has been sharper than expected. For FY21, Goldman Sachs predicts a recovery in the growth rate to 6.6 percent, said Prachi Mishra, India chief economist for Goldman Sachs, in a research note on Tuesday.

According to Mishra, there are some early signs of economic stabilisation. Goldman Sachs' ‘India Current Activity Index' accelerated by 0.7 percentage point in October, she highlighted. While confidence issues persist and continue to act as a downside risk to growth, liquidity conditions have improved, particularly for high-rated NBFCs, Mishra said.

NBFCs and housing finance companies account for 21 percent of system credit. Of this, the loan book of entities which fall in the ‘higher concern' bucket only account for 4 percent of system credit and, hence, will not have a large impact on the economy, according to Mishra.

Some of the other factors which may lead to an improvement in the economy include a stronger global economy and a positive fiscal impulse as government spending picks- up, particularly through off-budget entities such as NHAI.

Mishra, however, cautioned that the increased spending means that the fiscal deficit could be a matter of concern.

Goldman Sachs estimates the central fiscal deficit at 3.6 percent of GDP in FY20 and expects the general government deficit, which includes states, to be closer to 7 percent of the GDP.

Commenting on space for monetary policy, Mishra said that there is some space for further accommodation but not a whole lot more. Goldman Sachs expects a 25 basis points cut in the repo rate at the next monetary policy review on Thursday. As headline inflation inches up and past rate cuts start feeding into the economy, there might be a pause in monetary accommodation, she added.

Mishra said that the belief that the current slowdown is driven by domestic factors such as the NBFC crunch is a misconception. Goldman Sachs believes the slowdown began in January 2018, exactly when the global slowdown started, and way before the NBFC crisis hit in September 2018.

About 40 percent of the decline in the Goldman Sachs' ‘India Current Activity Index'' can be attributed to trading partner growth, Mishra said, adding that while there is a range of domestic factors at play, about 30 percent of the decline in the indicator can further be explained by a sharp decline in consumer confidence. Funding constrains and negative fiscal impulse is also important, Mishra said.