India: Time to Say Goodbye to $5 Trillion Economy According to Moody’s

Published March 29th, 2020 - 07:00 GMT
 India: Time to Say Goodbye to $5 Trillion Economy According to Moody’s
The latest dismal growth forecast will render a severe blow to the ambitious growth target of a nation. (Shutterstock)
Highlights
General lack of social safety nets, weak ability to provide adequate support to businesses and households among reasons for downgrade.

Moody's Investors Service has more than halved India's 2020 growth forecast to 2.5 percent within just three weeks of its previous downgrade to 5.3 percent, further dashing the country's much-vaunted hopes to become a $5 trillion economy by 2026.

According to the Global Macro Outlook 2020-21 released on Friday by the ratings agency, the 21-day lockdown announced by Prime Minister Narendra Modi would result in a sharp loss in incomes and further weigh on domestic demand and the pace of recovery even as some of the world's major economies, including the US, Germany, the UK, France and Italy, facing significant contractions in the first half of 2020.

"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," the report said.

The latest dismal growth forecast will render a severe blow to the ambitious growth target of a nation, which according to a recent ranking by the International Monetary Fund, has risen to become the world's fifth-largest economy with a GDP of $2.94 trillion, when ranked by nominal terms, leapfrogging France and the UK.

By 2026, India is expected to overtake Germany to become the fourth-largest economy and Japan to become third-largest in 2034, according to a recent report by the UK-based Centre for Economics and Business Research.

The country's GDP growth has been among the highest in the world in the past decade - regularly achieving annual growth of between 6-7 percent, fuelled by a number of factors, including urbanisation and technologies that have improved efficiency and productivity.

The Moody's report maintained its estimate of 5.8 percent growth for India in 2021. The latest growth reduction of 2.2 percent is in sharp contrast to the previous downgrade of 0.1 percent.

Earlier this month Moody's had revised its estimate to 5.3 percent from 5.4 percent in February. It had said the country's growth could slow down to 5 percent if the virus was not contained in its previous update.

Prior to the lockdown, S&P Global Ratings had downgraded its India growth forecast to 5.2 percent for 2020 while the Organisation for Economic Cooperation and Development lowered India's growth to 5.1 percent for this calendar year. More revisions are likely to come given the extent and duration of the lockdown.

Moody's also sharply revised China's growth forecast to 3.3 percent this year down from 4.8 percent. "Based on the latest high-frequency indicators, we estimate that China's economy contracted by around 10 percent in the first quarter on a sequential basis," Moody's said.

The agency forecast negative growth for major Western economies with estimates of contractions of 5.4 percent in Germany, 4.5 percent in Italy, 4.3 percent in the US, 3.9 percent in the UK and 3.5 percent in France during the first half of 2020. However, adequate social safety nets and capital inflows from risk-off sentiment in emerging markets would result in a relatively better recovery in these economies. Moody's expects the G20's combined GDP to contract by 0.5 percent in 2020 compared to a 2.6 percent growth forecast in November last year, before the emergence of Covid-19.

Growth in these economies is likely to recover to 3.6 percent in 2021, the report said.

Although governments and regulators across the globe are taking measures to contain the impact on their economies, which are likely to grow and deepen, the downside risks to growth remain sizeable.


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