India's economy constrained due to weakening household consumption: Moody's

Moody's Investors Service on Monday said that India's weak household consumption will affect economic growth and oppress the quality of credit issued by Indians in various sectors. Like other major markets, India's growth has declined with GDP rates falling to 4.5 per cent in the July to September quarter compared to 5 per cent in the April to June quarter. Moody's has lowered its GDP growth projection for India for the fiscal year which ends on March 2020 to 4.9 per cent from 5.8 per cent.

"What was once an investment-led slowdown has now broadened into weakening consumption, driven by financial stress among rural households on the back of stagnating agricultural wage growth and constrained productivity as well as weak job creation due to rigid land and labour laws," said Moody's Assistant Vice President and Analyst Deborah Tan.

READ | Supreme Court's AGR Ruling Will Impact Financial Health Of Airtel, Vodafone Idea: Moody's

He further said that credit crunch among non-bank financial institutions (NBFIs), which have been key means of retail loans in recent years, has aggravated this slowdown. "While the income shock to households has been unfolding over several years, it was not visible on headline growth as long as households could borrow from NBFIs. With the materialization of a credit supply shock, we now see the impact of these twin shocks on growth," added Tan.

Economic growth will remain weak

Meanwhile, Moody's expects that the measures taken by the government to boost domestic demand, which includes income support for farmers and low-income families, easing up monetary policy and a broad corporate tax cut, will not be enough in balancing this slowdown. Although the economic state is expected to recover for next year, provided support by spillovers from policy stimulus, economic growth will remain weaker than in recent years which will have negative credit implications for Indian issuers in many sectors.

WATCH | Nirmala Sitharaman reads out UPA's GDP figures in her LS counter on 4.5% Q2 growth

Weak demand and tight liquidity will limit automakers' earnings. The performance of commercial vehicle loans backing asset-backed securities (ABS) deals could decline if economic conditions remain subdued for a long period, says Moody's.

The slower economic growth is also expected to reduce the debt servicing capabilities of households, which in turn will weaken the asset quality of retail loans across all segments. As private-sector banks are widely exposed to retail loans, they may be more at risk. However, an increase in non-performing loans should be steady. 

READ | We should be growing at 8-9%: Former PM Dr Manmohan Singh on 4.5% Q2 GDP growth rate

(With inputs from ANI)