S&P Global Ratings on Tuesday reduced India’s growth projection for 2019-20 from 7.1% to 6.3%, but said it expected a “decent, albeit unspectacular" recovery in 2020-21 to 7%.

“India’s slump is deeper and more broad-based than we expected. In the April-June quarter, the economy expanded by just 5%, well below potential, which we estimate to be north of 7%. Most alarming has been the precipitous decline in private consumption growth that had been the engine of the economy in recent years—down to about 3% in the April-June quarter," it said in its quarterly report on the Asia-Pacific region.

Separately, data released by IHS Markit on Tuesday showed the India Manufacturing PMI at 51.4 in September—on a par with August, and the lowest since May 2018. “We’ve seen the gradual slowdown in manufacturing sector conditions continue in the second quarter of fiscal year 2019-20, with the PMI average for the quarter at its joint-lowest since the same period in 2017," said Pollyanna de Lima, principal economist, IHS Markit.

On Monday, data released by the industry department showed the output of India’s eight infrastructure sectors contracting for the first time in more than four years in August at 0.5%. Data separately released by the central bank showed non-food credit growth—a key indicator of consumption demand—decelerating to 9.8% in August from 12.4% a year-ago.

The rating agency said household confidence continued to remain soft and, after people dipped into savings to sustain spending in the recent quarters, there were signs of more caution. Long-awaited green shoots in investment were emerging, but the slight pick up in growth to 4% failed to offset fully weak consumption, it added.

On the government’s effort to stimulate the economy through substantial reductions in corporate taxes, S&P said it will cost the exchequer 0.7% of gross domestic product (GDP), though the net impulse will be smaller, with the government eliminating some exemptions. The report said short-term effect on the economy would be limited until businesses felt more confident about the outlook for demand. “Other fiscal support is more targeted and may lift demand in some segments of the economy—e.g., income transfers to farmers," it added.

For some emerging markets, including India and Indonesia, low inflation was a blessing since it created more room for cutting rates, S&P said. The RBI has reduced policy rates by 110 basis points in 2019. It is likely to cut rates again later this week by at least 25 basis points.

“We expect further cuts if external conditions (US rates and oil prices) provide space. Transmission will be imperfect, however, due to long-standing balance sheet constraints among public banks and stress among non-bank lenders. The negative surprises of recent quarters will continue to weigh on private domestic demand. So, while some recovery is likely, growth may remain below potential for some time," it added.

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