Indian Prime Minister Narendra Modi’s biggest economic challenge as he starts his second term will be how to boost flagging growth to hold onto the crown of the world’s fastest-expanding major nation.
GDP data yesterday were expected to show that the economy grew 6.3 percent in the first three months of the year, the fourth straight quarter of cooling. The annual expansion in the 12 months to March likely slowed to 6.9 percent, the lowest level in five years.
The economy has been on a steady slowdown since last year on the back of weaker consumption, waning global growth and an escalating US-China trade dispute. Growth is now almost neck-to-neck with expansion in China, where authorities are already ramping up efforts to spur subdued activity. After securing a bigger election victory than in 2014, Modi is now under pressure to unveil measures to bolster growth.
“Arresting the slowdown and reviving the economy will be the first challenge for the new government,” said Sunil Sinha, principal economist at Fitch Ratings Ltd in New Delhi.
Reviving investments, easing a credit crunch among shadow banks and taking steps to cushion India from a global slowdown will be key, Sinha said.
Fiscally, Modi has little room to stimulate the economy, having already pledged cash handouts of more than US$10 billion to farmers from April. He was to announce his Cabinet yesterday, including a finance minister to help implement economic policies.
The government has already deviated from its budget deficit goals and with revenue collections trailing targets, there is a risk that the shortfall for the fiscal year that ended in March could be higher than the estimated 3.4 percent of GDP. A miss would make India vulnerable to a credit-rating downgrade and push borrowing costs higher for local companies.
“Many of the policy choices to stimulate growth, like GST [goods and services tax] rate cuts, fiscal stimulus, monetary easing, also entail rising macro stability risks like inflation and current account deficit ahead,” UBS Group AG analysts led by head of India research Gautam Chhaochharia wrote in a note.
The Reserve Bank of India (RBI) on Thursday next week might play its part to support the economy, with analysts betting on another interest rate cut to spur lending. Inflation remains well below the central bank’s 4 percent medium-term target, giving policymakers room to ease.
Prachi Mishra, lead economist at Goldman Sachs Group Inc in Mumbai, said that she expects one more rate cut — although not this month — and for the central bank to inject more liquidity into the financial system.
“Going forward, we anticipate the banking system liquidity situation to normalize as currency in circulation reduces from its high post elections and with potential liquidity operations by the RBI,” Mishra said.
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