The forecast came ahead of the release the GDP numbers for the July-September quarter by the government’s statistics office, scheduled for November 29. India’s economy grew 6.8% in FY19.
“Economic growth is projected to recover to just under 6.5% in FY21 as election-related uncertainties fade and monetary and fiscal policies have become accommodative,” the OECD said in its economic outlook, even as it trimmed the projected global economic growth forecast to 2.9% next year, a decline of 0.1 percentage point from its September forecast. In September, it had forecast India’s growth at 5.9%.
The Reserve Bank of India has slashed its projection on economic growth for this fiscal year to 6.1% from 6.8% estimated earlier, its sharpest cut in at least five years, while the World Bank has last month lowered its forecast to 6% from 7.5%. Moody’s last week cut its estimate for India’s growth this year to 5.6% from 5.8%.
India’s GDP growth cooled for a fifth straight quarter to 5% in the first quarter of FY20, the slowest pace since March 2013.
Paris-based OECD said private investment would bounce back as capacity utilisation rises and the cost of borrowing for the corporate sector declines.
But it expects private consumption to slow to 5.9% in FY20 from 8.1% in FY19. Gross fixed capital formation (an indicator of investment) would slow to 4.9% from 10% in the previous fiscal year.
”Rural consumption will pick up, thanks to the good monsoon, the full implementation of the new income-support scheme for farmers and measures to reduce liquidity stress in non-banking financial companies,” it said.
As per the OECD, the ongoing resolution of distressed assets of non-financial corporates under the Insolvency and Bankruptcy Code is expected to unlock resources for new investment. It also expects help from reforms to improve ease of doing business, including measures to liberalise foreign investment, lower corporate income tax rates, and efforts to improve judicial services and contract enforcement.
However, the organisation emphasised that job creation remained a challenge and efforts to modernise labour regulations should continue.
Noting that the economy was bottoming out and growth had slowed from a rapid pace, it said construction had been hurt, as non-banking financial companies — which contribute a large share to its financing, weighing on job creation, income and consumption — are under stress.
It expects renewed stress in the banking or non-banking financial sector to create a credit crunch and affect growth, and higher oil prices to put pressure on inflation and reduce households’ purchasing power.
An aggravation of trade tensions would further affect business sentiment and investment, but it could be limited as India has specialised more in services than in merchandise trade, it said.
Overall, India has succeeded in seizing some of the market shares lost by other countries and exports have proved relatively resilient, according to the OECD.
The OECD batted for further reforms to improve financial sector soundness and the ease of doing business to revive corporate investment. It pressed for rebuilding the fiscal space to finance better infrastructure and public services.
“Tax reforms are needed to broaden the property and personal income tax base. Borrowings from public enterprises and banks also need to be restrained,” it said.
There is still some room for further accommodation in monetary policy, as headline consumer price inflation has remained close to the 4% target and core inflation is adjusting down, it said. Retail inflation had accelerated to a 16-month high at 4.62% in October.
The RBI has cut interest rates by a cumulative 1.35 percentage point this year and will review rates again in December.
“Given sticky inflation expectations and uncertainty around food price developments because of local floods, further cuts in policy rates should remain prudent,” it said.
The organisation said a record transfer from the RBI would help contain the general government deficit for FY20. The transfer of reserves comprised Rs 1.23 lakh crore of surplus for 2018-19. The government has a fiscal deficit target of 3.3% of GDP for the fiscal year.
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