The bank said the main sources of risk included external shocks that result in tighter global financing conditions, and new NBFC defaults triggering a fresh round of financial sector stress. However, the bank in its latest edition of the South Asia Economic Focus said the country was expected to gradually recover to 6.9% in 2021 and 7.2% in 2022 as it assumed that the monetary stance would remain accommodative, given benign price dynamics. Significant slowdown in the first quarter of the fiscal year and high frequency indicators, thereafter, suggested that the output growth would not exceed 6% for the full fiscal year, the bank said, adding the main policy challenge for the country is to address the sources of softening private consumption and the structural factors behind weak investment.
“This will require restoring the health of the financial sector through reforms of public sector banks’ governance and agradual strengthening of the regulatory framework for NBFCs, while ensuring that solvent NBFCs retain access to
adequate liquidity,” it said.
The bank said this will also require efforts to contain fiscal slippages, as higher-than-expected public borrowings could put upward pressure on interest rates and potentially crowdout the private sector. To mitigate these risks, the authorities would need to ensure that there was adequate liquidity in the financial system while strengthening the regulatory framework for the NBFCs, the bank added.
The report said the consumption was likely to remain depressed due to slow growth in rural income, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from NBFCs.
Most agencies, including the RBI, have cut growth estimates in view of the slowdown. RBI lowered growth projections for the fiscal year to 6.1% from 6.9%, saying it is likely to be near this trough at 5.3% in the July-September quarter.
Ratings agency Moody’s Investors Service, last week, lowered its growth forecast for India to 5.8% for the current fiscal year from 6.2%. The economy grew at its slowest pace in six years at 5% in April-June quarter in the
current fiscal. Industrial production contracted 1.1% in August, the worst performance in almost seven years.
To revive the economy, the central bank has cut rate five times this year and the government has unveiled several measures including a sharp cut in corporate tax. It said investment would benefit from the recent cut in effective corporate tax rate for domestic companies in the medium term, but will also continue to reflect financial sector weaknesses, the report said.