Tightening credit conditions, the risk of higher non-performing assets, falling property prices and moderation in personal disposable incomes due to job cuts could work against the expansionary effects of monetary policy. Similarly, problems with project implementation and adequate utilisation of planned expenditure are likely to rein in the efficacy of fiscal policy initiatives.
“However, we believe that these impediments are likely to only slow the pace of policy measures – not render them completely ineffective. As a result, we expect the policy measures to gain traction in the second half of next year and support a growth rate of 5.8% in FY10,” said Abheek Barua, chief economist with HDFC Bank in his report on the domestic growth outlook FY10, which was released on Monday.
Also, the savings rate is likely to drop in FY10 as lower profit margins shrink the private corporate savings rate (7.8%) and contra-cyclical fiscal policy (higher deficits, to put it simply) dampens the government savings rate (3.2%). “Despite this, our estimates suggest that gross savings rate for the economy is likely to remain close to 30% of GDP,” he says. This may be enough to fund at least an initial revival in investment momentum provided local consumer demand is forthcoming and there is adequate savings mobilization.
Higher credit risk and tighter lending standards are likely to contain bank lending. Lending is expected to pickup around H2FY10 as banks look to replace gains on investment in government securities. Yields are likely to bottom out along with inflation in Q2FY10 as the pace of monetary easing slows dramatically. With deposit rates likely to show some inflexibility on their way down, lower yields are also expected to reduce the opportunity cost of expanding bank lending .