Foundering of a major non-banking financial company in 2018 led to a rise in risk aversion in the financial sector, says report

The Asian Development Bank has lowered its forecast for India’s GDP growth in the current financial year 2019-20 to 5.1% from its earlier estimate of 6.5%.

“Growth in India is expected to slow to 5.1% in 2019 as the foundering of a major non-banking financial company in 2018 led to a rise in risk aversion in the financial sector and a credit crunch,” the ADB’s Asian Development Outlook Supplement 2019 said. “Also, consumption was affected by slow job growth and rural distress aggravated by poor harvest.

“Having already slowed year on year from 5.8% in Q4 of 2018 to 5% in Q1 of 2019, growth in India fell further to 4.5% in Q2, the lowest quarterly rate since Q4 of 2012,” the report added. “This put growth in the first half of FY2019 at 4.8% as expansion in private consumption slowed to 4.1% and in investment to 2.5%.”

The bank, however, said that policy support will help growth recover to 6.5% in 2020. It had earlier estimated growth in 2020 to hit 7.2%.

“Some tentative signs have emerged that the Indian economy is stabilising in the second half of 2019,” the report said. “Growth is expected to benefit from government policy measures in recent months - notably a corporate tax cut, divestment from some state-owned enterprises, capital injections into public banks, and policy rate reduction by a total of 135 basis points - with further measures possible in the coming months.

These measures, along with low oil prices and a weakening rupee, could help growth recover in 2020-21, the report said, but added that risks to the projections remain tilted to the downside.