Moody’s cuts India's GDP growth forecast to 2.5%

Global economy likely to contract by 0.5%

Moody’s Investor Service has slashed its GDP growth forecast for India to 2.5% in 2020 – a sharp drop from an earlier projection of 5.3%, due to the impact of the COVID-19 pandemic and the resultant lockdown.

Also read: Moody’s downgrades Indiabulls

The ratings agency expects the country’s economy to recover in 2021, estimating a growth rate of 5.8%, but warned that uncertainty regarding the virus’s spread and containment makes it difficult to fully assess the economic toll of the crisis. India grew at 5% in 2019.

Globally, the world economy was facing an “unprecedented shock” and the G20 countries were likely to see an overall contraction of GDP by 0.5%, said Moody’s Global Macro Outlook 2020-21, released on Friday. It projected that the G-20 GDP growth rate, which was 2.6% in 2019, is likely to recover to 3.2% in 2021.

At the low growth rate of 2.5% in 2020, India may see a sharp fall in incomes, further weighing on domestic demand and the pace of recovery in 2021. “In India, credit flow to the economy already remains severely hampered because of severe liquidity constraints in the bank and non-bank financial sectors,” said the report.

While advanced economies may see sharp contractions in their economies in 2020, it was emerging market countries such as India which may struggle with the recovery once the crisis was over, said the report.

Also read: Moody’s lowers India’s outlook to ‘negative’ from ‘stable’, Govt rebuts

“A general lack of social safety nets, weak ability to provide adequate support to businesses and households, and inherent weaknesses in many major emerging market countries will amplify the effects of the coronavirus-induced shock. Additionally, emerging market countries with relatively open capital markets remain vulnerable to risk-off financial market sentiment as the growth outlook deteriorates,” it said. “As a result, recoveries in many of the emerging market economies will likely be relatively more muted than those in advanced economies and China.”

Business activity hit

The ongoing 21-day lockdown in India has brought business activity in most sectors of the economy to a halt and resulted in thousands of job losses. The Centre has announced a welfare package to provide support to the most vulnerable communities at this time.

However, Moody’s warned that, “Even in countries where governments are in a position to provide support through large and targeted measures, some small businesses and vulnerable individuals in less-stable jobs will likely experience severe financial distress.”

Globally, the ratings agency estimated that the U.S. economy would contract by 2% in 2020, while the Euro area would see a 2.2% contraction. China’s economic growth rate was expected to slow to to 3.3%, although it was expected to recover to 6% in 2021.

However, a resurgence in new cases in areas which have seen some flattening of the curve was especially worrisome. “There are significant unknowns, such as how long the virus will take to be fully contained and, by extension, how long economic activity will remain disrupted,” said the report. “In particular, a sustained pullback in consumption and prolonged closures of businesses would hurt earnings, drive layoffs and weigh on sentiment. The longer these conditions persist, the more they would potentially feed self-sustaining recessionary dynamics, and expose existing vulnerabilities in the real economy and in financial sectors,” it added.

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