New Delhi: Amid the call for higher public spending to spur growth, the Confederation of Indian Industries (CII) sounded a note of caution Thursday. The CII said that the government should guard against increasing fiscal deficit that may prompt rating downgrade. It will result in other consequences for the economy.
Earlier this week, Moody’s Investors Service downgraded India’s sovereign rating to ‘Baa3’ from ‘Baa2’. Moody’s said there will be challenges in implementation of policies to mitigate risks of a sustained period of low growth and deteriorating fiscal position.
In its agenda document 2020-21, the CII also refrained from making an estimate on economic growth this fiscal year given the uncertainty of the situation against the backdrop of COVID-19 pandemic.
There is currently a consensus amongst economists that the Indian economy will witness a contraction in 2020-21. The question however, is how deeply negative the growth is likely to be, the chamber said.
The Reserve Bank of India (RBI) also expects GDP growth to remain negative in the current financial year. Amid projections of sharp contraction in global economy, many agencies have downgraded India’s growth forecast for the fiscal, indicating a steady moderation in their growth expectation culminating in widespread expectation of deep contraction.
Observing that government spending has been supporting the economy over the last few years, the CII said for substantive recovery to kick in, government spending would be crucial.
“However, with an increasing fiscal deficit and mounting government debt, the economy runs the risk of rating downgrades which has consequences. Moody’s has recently downgraded India’s rating from ‘Baa2’ to ‘Baa3’, the lowest in investment grade, with a negative outlook on worries over growth and fiscal risks,” the CII said in a statement.
“Any further downgrades will make India susceptible to flight of capital and leave its currency vulnerable,” the industry body added.
The CII pointed out that the coronavirus-induced lockdowns, wherein economic activity came to a virtual standstill, will deepen the slowdown sharply.
“The Indian economy is expected to contract this year, an outcome that we have experienced only five times in the last 70 years,” the body said.
With the Indian economy entering the ‘Unlock Phase 1.0’, economic activity is expected to pick up.
However, it is difficult to say what will be the shape of the recovery, the chamber said while highlighting that the need of the hour is for government and industry to work together to return to a sustainable growth path.
The CII has outlined a ‘10-Point Roadmap’ to revive growth and navigate the challenges of loss of lives and livelihoods posed by the global pandemic COVID-19. It has forced countries across the world to reset their growth paths.