Fiscal measures, however, may be necessary to offset the structural challenges
Acuité Ratings believes that the Government needs to consider fiscal measures to revive the growth momentum of the economy which has witnessed a significant slowdown over the last six months. RBI has already taken important steps to reverse the impact of the slowdown through an intensely accommodative monetary policy along with regulatory tweaks to incentivize bank lending. However, the structural challenges in monetary transmission and the heightened credit aversion are important challenges that needs effective remedies. Therefore, timely fiscal measures may be necessary to improve the consumption and the investment climate and put back the economy in the growth orbit of 7%-8%.
Clearly, a global slowdown is in evidence with almost all the major developed and the emerging economies recording a decline in GDP growth in the first two quarters of the current calendar. Heightened trade conflicts particularly between USA and China, Brexit overhang in the European Union and the geo-political risks from the re-imposition of sanctions on Iran are some of the key factors that have aggravated the global slowdown. Some of these economies have already started to pursue a vigorously accommodative monetary policy with quick rate cuts and ample liquidity infusion.
The headwinds in the Indian economy are also increasingly visible with the latest figures of IIP (index of industrial production) slowing down to 3.6% in Q1FY20 as compared to 5.1% in Q1FY19. Acuité Ratings has revised its growth forecast for India downwards to 6.9% for FY20 given the data emerging from the high frequency indicators. Nevertheless, the other key macro-economic parameters for the Indian economy remain fairly stable mainly the inflation rate, the current account deficit and the foreign exchange reserve position. This, in our opinion, enables the government to adopt a few fiscal measures to rev up the economy. While the fiscal deficit target for the current year is at 3.3%, there is a strong case for a relaxation on this matter.
The need for fiscal measures arises all the more given the structural challenge today in effective monetary transmission and the increasing credit aversion among the banker and the investor community. The continuing large NPA overhang and the health of the banking sector is making rate transmission difficult, as evident in the modest rate cuts being effected by the banks in response to RBI's measures. Further, it has also built a credit aversion in the system further accentuated by a few large defaults in the debt capital markets. This continues to slow down credit delivery to the corporate and the MSME sectors. We are of the opinion that the government should mull steps such as tax incentives for key sectors and a rapid step up in infrastructure investments to improve the consumer and the investor sentiments and thereby, re-construct the growth momentum.