International rating agencies continue to predict that the Indian economy is on a downward slope with Moody’s being the latest to cut the country’s rating outlook to negative. The basis for this assessment appears to be the situation associated with the shadow banking or the non-banking financial companies (NBFC) sector. The drop in the GDP growth rate to 5% is also cited as the reason for the downgrade.
"While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among non-bank financial institutions have increased the probability of a more entrenched slowdown," Moody's is quoted as saying.
The Finance Ministry acknowledged the rating downgrade by Moody’s but maintained that the Indian economy continues to be one of the fastest growing ones in the world, when pitted against the major countries. It further maintains that the fundamentals of Indian economy remain robust with inflation under check and bond yields low. "India continues to offer strong prospects of growth in near and medium term," the Finance Ministry reportedly said.
While Moody’s feels that the recently announced corporate tax rate reduction would put pressure on the country’s fiscal deficit due to fall in revenue collections, the government says it is hoping that the move would make the country an attractive destination for investments. More investments can mean more jobs. Therefore, any fall in the GDP growth rate can be stemmed through new ventures and expansion of existing ventures contributing to the growth.
Moody’s is projecting a fiscal deficit of 3.7% by the end of the fiscal, though so far, the government has been saying that it is committed to holding it at the 3.3% level. The government will heavily depend on the revenues from disinvestments for which a target of Rs 1.05 lakh crore has been set in the budget. A large part of this amount has to come through the 100% disinvestment of the national carrier Air India. The process has been set in motion, but it may yet be a long way before the suitable buyer is found and the transaction to be completed. The Petroleum Minister has yesterday hinted that the government wants to get out of the oil business as well.
The government has found a new route of asking some of the cash-rich public enterprises like LIC to make investments in some of the public sector enterprises by buying the government’s stake. This is also expected to be reflected in the revenues this year.
On the slowing down of the economy, the government has been continually making announcements to revive individual sectors, the last one being the Finance Ministers announcement relating to the real estate sector. The RBI too, has made several cuts in the interest rates. Though the banks were reluctant to pass on these cuts to the borrowers, of late there have been moves to make the interest rate regime on retail loans at least more transparent by linking them to the benchmark rates.
Some of the leading bankers have said liquidity in the economy is not a constraint.
The larger question is how to boost the demand side of the economy so that spending can increase, setting the cycle in motion.