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FY21 may see worst ever decline in GDP

FY21 may see worst ever decline in GDP

Goldman Sachs and Fitch Ratings on Tuesday forecast deeper-than-previously estimated economic recession for India in FY21 holding that limited fiscal support, fragilities in the financial system and a continued rise in coronavirus cases are hampering a rapid normalisation in economic activity.

Investment bank Goldman Sachs anticipates India’s gross domestic product (GDP) to shrink 14.8% this fiscal against its earlier estimate of an 11.8% contraction. Fitch Ratings, meanwhile, cut its growth forecast for India for FY21 to a contraction of 10.5%, more than double the 5% contraction projected in June.

The latest estimates by Fitch and Goldman Sachs are among the worst for the Indian economy for this fiscal, which may make it the deepest contraction so far in India’s history. The previous lowest was a GDP contraction of 5.2% in FY80.

India’s economy contracted 23.9% in the June quarter in the steepest pace in four decades. It was the worst performance among G20 nations, and significantly below expectations of most economists, as the stringent covid-19-induced national lockdown created a double-whammy through both a supply and demand side shock as businesses shut operations while consumers were forced to stay home.

“In light of the Q2 (June quarter) GDP report, we are making further significant adjustments to our GDP forecasts for India. We now forecast Q3 (September quarter) 2020, and Q4 (December quarter) 2020 at GDP growth of -13.7% yoy and -9.8% yoy, respectively (compared to -10.7% yoy and -6.7% yoy previously). Our estimates imply that real GDP falls by 11.1% in calendar year 2020, and by 14.8% in FY21 (vs growth of -9.6%, and -11.8% in our previous forecasts),” Goldman Sachs said in a research note.

However, Goldman Sachs upgraded its expectations of a rebound next year. “In Q2 (June quarter) 2021, we expect real GDP growth to bounce back sharply on a year-over-year basis due to favorable base effects. Assuming ~70% of the lost output in June 2020 is recovered in June 2021, we expect real GDP in Q2 2021 at +27.1% yoy. Going forward, assuming a step down to more normal levels of sequential growth, we now expect average annual GDP growth in CY21 and FY22 at 9.9% and 15.7% respectively (relative to 3.8% and 7.0% before). Our forecasts assume that in level terms, real output in March 2022 would still be ~2% below its level in March 2020,” it added.

In its latest Global Economic Outlook for 2020, Fitch revised upwards its global GDP estimate to a contraction of 4.4% from a contraction of 4.6% estimated in June, as it raised its growth estimates for the US (0.6%) and China (2%). Fitch said its global GDP estimate for 2020 is weighed down by deeper contractions expected in India, Eurozone and the UK.

The rating agency said India’s GDP should rebound strongly in the September quarter amid a re-opening of the economy, but there are signs that the recovery has been sluggish and uneven. “The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in 3Q20 (September quarter). Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending,” it added.

Fitch said multiple challenges are holding back the recovery in India, both in the short and medium term. “New cases of the coronavirus continue to increase, forcing some states and union territories to re-tighten restrictions, though these localised containment measures are generally less stringent than in March-April. The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity,” it added.

The severe fall in activity has also damaged household and corporate incomes and balance sheets, amid limited fiscal support, the rating agency said. “A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers,” it added.

Fitch said the recent spurt in inflation has added strains to household incomes. “Supply-chain disruptions and excise duties increases have caused prices to rise. However, we expect inflation to slow amid weak underlying demand, an easing in supply-chain disruptions and a good monsoon,” it added.

India poised to see worst ever contraction in GDP this fiscal year

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