The fiscal measures taken by the government and the banks which include a corporate tax cut, farmer income support and the monetary policy easing to prevent slowdown will have restricted role in increasing the consumption demand in the market, says international rating agency Moody’s Investor Service. The agency blamed sluggish agriculture growth and constrained productivity one reason for no-job creation in the economy.
Making a forecast for financial year 2020 growth rate to 4.9% down from a previous downgrade to 5.8%, the agency cautioned about the possible impact of slower growth that hampers the prospects for significant fiscal consolidation, in return, it has bearings on nation’s credit profile. The agency also slashed the growth rate for financial year 2021 to 6.3% from previous 6.6%.
Moody’s assistant vice-president and analyst Deborah Tan says, ‘What was once an investment-led slowdown has now broadened into weakening consumption, driven by financial stress among rural households on the back of stagnating agricultural wage growth and, as well as weak job creation due to rigid land and labour laws’.
The nominal GDP growth along with tax cuts have increased the risk that debt may not stabilize, let alone decline, said the agency. The household consumption in financial year 2018-19 has made up to 57 per cent of GDP as the backbone of Indian economy.
The financial stress of rural household resulting in liquidity constraints and low job creation has been the major factor for weakening economic growth. The report of the agency underlined that the slowdown in the economy has been aggravated by the credit crunch among non-bank financial institutions (NBFIs) which provide loans to retails and real estate.
“While the income shock to households has been unfolding over several years, it was not visible on headline growth as long as households could borrow from NBFIs. With the materialisation of a credit supply shock, we now see the impact of these twin shocks on growth,” Tan added.
The credit agency Moddy’s noted that such measures like income support for farmers and low-income households, monetary policy easing and a broad corporate tax cut to spur the demand and consumption in the market will have a limited role in preventing the economic slowdown.