Covid-19 impact: India's economy to contract 9% in FY21, says S&P

Standard & Poor’s (S&P) has revised the rate of fall in gross domestic product (GDP) to nine per cent for the current fiscal year from the 5 per cent it estimated earlier. 

It assessed that impact of the rising Covid-19 cases on private spending and investment will be for a longer period than what was expected earlier. S&P said India’s high deficit limits the scope for fiscal stimulus and the targeted stimulus measures ann­ounced so far amount to about 1.2 per cent of GDP.

“This magnitude is lower compared with global averages. The International Monetary Fund (IMF) estimates that, on an average, comparable stimulus measures across global emerging markets have been about 3.1 per cent of GDP,” S&P added.

The potential for further monetary support is curbed by India’s inflation worries, S&P Global Ratings Asia-Pacific Economist Vishrut Rana said. “One factor holding back private economic activity is the continued escalation of Covid-19,” Rana added.

Rising Covid-19 cases in India will keep private spending and investment lower for longer, S&P said. S&P Global Ratings now expects the country’s economy to contract by 9 per cent in the current fiscal year, which ends on March 31, 2021.

However, the economy would bounce back to 10 per cent growth in 2021-22. 

The rating agency said the growth outlook includes a weaker recovery in informal sectors of the economy and deeper economic losses for micro and small enterprises.

“In addition, if credit quality worsens materially, following the expiration of loan moratoriums, the recovery will be slow. One factor that presents potential upside to growth is the availability of a widely-distributed Covid vaccine earlier than our current estimate of around mid-2021,” S&P added.

It said the 23.9 per cent contraction in the April-June quarter was larger than expected.

“While India eased lockdowns in June, we believe the pandemic will continue to restrain economic activity. New cases per day in India averaged nearly 90,000 in the week ending September 11, according to data from the World Health Organization (WHO).  This is up from an average of about 70,000 per day in August. As long as the virus spread remains uncontained, consumers will be cautious in going out and spending and firms will be under strain,” S&P said.

Last week, two other global rating agencies – Moody’s and Fitch – projected the Indian economy to contract 11.5 per cent and 10.5 per cent, respectively, in the current fiscal year. However, Goldman Sachs has estimated the contraction at 14.8 per cent.

Domestic agencies — India Ratings and Research projected contraction at 11.8 per cent, while ICRA forecast it at 9.5 per cent. CRISIL estimated contraction at 9 per cent.

S&P said even as industrial activity is recovering faster than services, high frequency indicators suggest that output is still lower compared to the same period last year. Hence. growth for the July–September quarter will be negative year-on-year.