RaboResearch - Economic Research

India: Economic Outlook 2020


  • We forecast economic growth in India to be 5.1% for fiscal year 2019/20 and 5.7% for 2020/21
  • The relatively weak print for 2020/21 is related to weaker global growth due to recessionary risks in the US (later in 2020). It is unlikely that India will be resistant to these developments but their impact will probably be lower than in many other emerging economies, such as Mexico, Vietnam and the Philippines
  • Ongoing structural issues are expected to weigh on India’s medium- and longer-term growth potential
  • The recent growth slowdown could result in some fiscal slippage by the government. We think the central government’s fiscal deficit will end up at -3.7% of GDP for fiscal FY2019/20, a breach of the fiscal deficit target of -3.3%
  • Given the weak fiscal metrics, we do not anticipate additional major stimulus programs in the Union Budget on 1 February
  • On the monetary side, we believe the Monetary Policy Committee (MPC) will adopt a status quo in the February meeting to prevent higher prices becoming anchored in inflation projections
  • After a rocky start to 2020, the INR is expected to strengthen against the USD in coming months to levels between 70 and 71
  • From mid-2020 we expect the USD/INR to slide to 72-73 due to renewed trade tensions between China and the US and underwhelming performance of the Indian economy due to the absence of structural reforms in the past


2019 will be remembered as a difficult year for the Indian economy. After five consecutive quarters of lower economic growth and the very weak GDP print for fiscal q2 of 4.5%, it is safe to say that the Indian economy is going through its most serious economic crisis since taper tantrum in 2013. This raises the question: what can we expect for the Indian economy in 2020, and beyond? In this report we discuss our forecasts for economic growth, government policy and the fiscal position, inflation and monetary policy, and, finally, our forecast for the Indian rupee (INR). 

Read further below the video. 

Economic growth

In the short term, we see some green shoots in the high-frequency data (see Table 1). Areas where we see some recovery are private consumption indicators, industrial production (IIP), purchasing managers indices and the external sector. This recovery is taking place against the backdrop of several steps taken by the government 2019 to mitigate the economic crisis (we elaborate on these measures later on in this report). With a contribution of government consumption to GDP of 1.9ppts (the quarterly average over the last five years was 0.8ppts), the government’s hand was already clearly visible in the fiscal q2 print.

Table 1: Some green shoots in the economy
Table 1: Some green shoots in the economySource: Macrobond, Rabobank
Figure 1: India’s economy has bottomed out
Figure 1: India’s economy has bottomed outSource: Rabobank, CSO, Macrobond

Based on these developments, we expect that the economy has bottomed out (Figure 1). Quarterly growth is likely to return to figures exceeding 6% in H1 of fiscal 2020/2021. However in H2 we foresee growth levelling off again due to an expected US recession, which feeds into lower economic activity in other parts of the world. It is unlikely that India will be resistant to these developments but their impact will probably be lower than in many other emerging markets (EMs), such as Mexico, Vietnam and the Philippines. This is due to the fact that India has a large internal market and is less dependent on the export sector than many other EMs. Moreover, India’s economy already took a beating in 2019, which will likely limit the scale of a potential double dip. Ultimately, we have pencilled in a growth figure of 5.1% for fiscal year 2019/20 and 5.7% for fiscal year 2020/21.

Medium term growth forecasts

Figure 2: Our structural GDP forecasts for India are lower than IMF's
Figure 2: Our structural GDP forecasts for India are lower than IMF'sSource: IMF World Economic Outlook, Macrobond, Rabobank

From a medium-to longer-term perspective, we think it will be difficult for the Indian economy to realise growth figures exceeding 7% (see Figure 1). We have toned down our projection of India’s structural economic growth potential[1], as the economy is still dealing with some ongoing structural issues. First, labor market problems will continue to put downward pressure on participation rates and are hampering a better division of labor across different industries. Second, former Chief Economic Advisor Arvind Subramanian has shown that there are unresolved balance sheet problems in four segments of the economy: infrastructural companies, the banking sector, non-banking financial companies and the real estate sector. These problems will likely continue to put a brake on credit growth and investment. Finally, we expect the average annual contribution of 1.9ppts of total factor productivity (TFP)[2] to be somewhat lower than the past five years (3.4ppts). This is partly caused by an anticipated growth slowdown of inward foreign direct investment (FDI). Against the backdrop of a reversed globalising trend and India’s increasingly protectionist stance (e.g. the November withdrawal from the Regional Comprehensive Economic Partnership (RCEP) negotiations), it is unrealistic to assume that the FDI ratio will continue to grow at the same pace as in recent years. Moreover, we expect investment in domestic innovation to grow at a slower pace than the five years.

We anticipate that India’s structural economic growth potential will lie around 5% to 6% once stripped of cyclical movements. This is significantly lower than the IMF’s forecast of potential growth (Figure 2), although economic growth for calendar 2019/2020 has recently been lowered to 4.8% and 5.8%, respectively.

Government policy and the Union Budget

As said, in 2019 the government launched several policy measures. These include the renewal of the government vehicle fleet, the launch of the Pradhan Mantri Kisan Samman Nidhi scheme (more commonly known as the income support scheme for farmers) of INR 750bn, the merger of ten state-owned banks into four entities, an acceleration of an INR 700bn capital infusion for banks, the removal of a surcharge on portfolio investments, a significant cut in corporate taxes (reducing the base rate from 30% to 22%) and, finally, an investment package in infrastructure of 102 lakh crore (roughly USD 1450bn) over the next five years. Although these measures are certainly helping to keep the economy from sliding further into the abyss, it remains to be seen if they are sufficient to truly brighten the prospects for the economy.

Union Budget and fiscal deficit

Figure 3: Fiscal deficit is expected to slip to -3.7%
Figure 3: Fiscal deficit is expected to slip to -3.7% Source: Rabobank, Macrobond

We do not envisage that Finance Minister Nirmala Sitharaman will announce additional major stimulus programs in her presentation of the Union budget on 1 February. For one thing, the government is likely to breach its fiscal deficit target of -3.3% due to the severe economic slowdown. We expect the fiscal deficit of the central government to come out at -3.7% of GDP for fiscal FY2019/20 (see Figure 3). Our GDP expectations are much lower than the government Budget forecasts in July of 2019, on which the fiscal deficit target of -3.3% is based. In addition, the corporate tax rate cut and weak Goods & Services Tax (GST) collections (partly due to lower private consumption) add to the expected shortfall in revenue collections. Data of the Controller of General Accounts show that the government had already breached the target by 14.8% after only 8 months in November 2019. However, the final deficit could end up lower if the (interim) dividend paid by the RBI to the government is higher than anticipated and if part of the government activities are moved off-balance sheet. For fiscal 2020/21, we expect the deficit to arrive at 3.5%, as economic growth will pick up again gradually.

Structural reforms

We also expect the Finance Minister to loosen the fiscal constraints by raising the fiscal deficit target somewhat. This will not necessarily provoke a volatile response by financial markets, as investors and analysts are pretty much aware that a breach of the initial fiscal target (of -3.3%) is unavoidable and that the government needs more fiscal room to act and get the economy back on track. Fiscal slippage would be easier for capital markets to digest if the government were to seize the opportunity of the Union Budget to announce the structural reforms that the economy desperately needs (e.g. in the F&A sector and the labor market). The IMF is clear that higher potential growth must come from home-grown domestic structural reforms. The government could also safeguard higher potential growth by intensifying and speeding up the implementation of its education and innovation policy. Scenario calculations conducted in one of our previous studies show that ambitious actions taken on these two key determinants of productivity could lift average annual growth by more than 5ppts compared to our baseline scenario.

Inflation and monetary policy

Besides the steps taken by the central government, the Reserve Bank of India has been trying to revive the economy by slashing its policy rates by 135bps since the beginning of 2019. However, two issues will likely deter the RBI from taking any further steps. First and foremost, India is currently experiencing ‘stagflation’ conditions: weak economic growth in combination with surging prices. Inflation has been rising rapidly since September and with the December print of 7.3% (y-o-y), inflation breached the upper band of the RBI’s target range. Moreover, we expect inflation to be high at 6.3% on average in fiscal q4, before levelling off (Figure 4).

The higher inflation is mainly transitory in nature, caused by spiking food inflation (December: 14%) and unfavourable base effects. Nonetheless, we expect the Monetary Policy Committee (MPC) to adopt a status quo in the February meeting to prevent higher prices from becoming anchored in inflation expectations. At the current juncture, the MPC will probably prefer to wait and see what the GDP print for fiscal q4 brings in late February. If that print underwhelms and inflation levels off, we might see another cut of 25bps in April. Finally, we think that the RBI will use an insurance cut of 15bps in fiscal q3 in response to the US recession that we have pencilled in and the aggressive cutting cycle by the US Fed, which we projected to go all the way back to zero (Figure 5).

Figure 4: RBI is expected keep rates on hold over rising inflation
Figure 4: RBI is expected keep rates on hold over rising inflationSource: CSO, RBI, Macrobond, Rabobank
Figure 5: Rates differential is not expected to breach 3ppts
Figure 5: Rates differential is not expected to breach 3pptsSource: CSO, RBI, Macrobond, Rabobank
Figure 6: A broken transmission mechanism
Figure 6: A broken transmission mechanismSource: Macrobond, Rabobank, RBI

A second motive for the RBI to continue its pause is that its aggressive cutting cycle has not been very effective in reviving credit growth, as the transmission in lower lending rates is still not functioning properly (Figure 6). This could be due to the fact that commercial banks are increasingly competing for savings with the government’s small savings scheme (SSS), which generally offers a higher deposit rate (8%) than commercial banks (roughly 7%). This fiscal year, SSS already raised 10% of net time deposits raised by commercial banks, which explains why banks are reluctant to lower lending (and deposit) rates, as this would definitely increase switching behaviour by clients.

INR forecasts

The Indian rupee (INR) experienced a rocky start to 2020 caused by the increased geopolitical tensions between the US and Iran. This fuelled a risk-off sentiment among investors, which in general does not bode well for EM currencies. Since India’s import basket is heavily oil-related it has the additional disadvantage that the tensions put upward pressure on oil prices.

Figure 7: INR is expected to weaken in second half of 2020
Figure 7: INR is expected to weaken in second half of 2020Source: Macrobond, Rabobank

However, the tensions have subsided somewhat for now and the USD/INR recovered from elevated levels of 72 seen early in January. We expect the INR to keep a steady course against the US dollar in the coming months (see Figure 7 and Table 2) between 70 and 71. This is driven by a positive investor sentiment towards EMs, relative calm on the US-China trade front and a gradual recovery of the Indian economy.

However, mid-2020 we expect the USD/INR to slide to 72-73, caused by recessionary risks in the US, renewed trade tensions between China and the US (and perhaps even between the US and the EU) and an underwhelming performance of the Indian economy due to the absence of structural reforms in the past. Nevertheless, we expect the INR to relatively outperform many of its Asian currency peers: the Indian economy already faced most of the pain in 2019, whereas we think other Asian countries (like Thailand and Malaysia) are still up for a shock. For instance, we expect the IDR to lose 7% in 2020 on a 12-month basis (against the USD), and the THB and the MYR are expected to lose 11% and 9%, respectively.

Table 2: Rabobank’s INR forecast
Table 2: Rabobank’s INR forecastSource: Rabobank

Risks to the INR outlook

Table 3: India ranks first on the size adjusted WWTG index
Table 3: India ranks first on the size adjusted WWTG indexSource: Macrobond, Word Bank, 2018 JETRO survey, Rabobank calculations

Of course there are many external factors that could put additional strains on the INR. We have factored in some of these risks, such as renewed tensions on the US-China trade front and US recessionary risks. But there are many more problems that might emerge which we have given only limited consideration: for instance a Transatlantic trade war, geopolitical tension between Europe/US and Russia, a hard Brexit, a more substantial China slowdown than we have currently anticipated or other, oil-related, price shocks. Domestic risks that need close monitoring are re-emerging tensions with neighbouring Pakistan, environmental issues (such as a disrupted monsoon, drought and water supply) and ongoing woes in the banking sector which weigh on credit growth. On the other hand, an upward risk for the INR could emerge if inward FDI increases markedly due to the US-China trade war. Our Where Will They Go (WWTG) index ranks India as the fifth most likely country for the relocation of production activities which previously took place in China. If we include market size, India even tops the list (see Table 3). This potential inflow of FDI could lead to some strengthening of the INR. All in all, however, we believe that the downward risks outnumber the upside ones.


[1] In the past we used less sophisticated filtering techniques to gauge India’s growth potential and recently replaced this approach by a structural growth model. For an extensive assessment of India’s structural growth, see this report.

[2] TFP measures the level of technology in the broadest sense of the word, as it indicates how productive both capital and labor are in generating value added.

Annex: Rabobank’s forecasting framework for India

Hugo Erken
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2223 1650
Sophie Borra
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3034 8515

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