GDP to contract 8.6% in FY21, fiscal stimulus needed soon: UBS Securities

UBS Securities said it forecasts a GDP contraction of 8.6% in FY21 as against its earlier prediction of 5.8%, citing factors including the modest government response to the crisis for its estimate

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Swiss brokerage UBS Securities said it forecasts a GDP contraction of 8.6 per cent in FY21 as against its earlier prediction of 5.8 per cent, citing factors including the modest government response to the crisis for its estimate.

It said the country's potential rate of growth has also come down to 5.75-6.25 per cent as per its estimate as against 7.1 per cent, driven by factors including the weak government response to arrest the growth slide.

Some improvement is being observed in the high frequency data, but much of it is pent-up demand and economic recovery will be gradual after the September quarter, its chief economist Tanvee Gupta Jain told reporters.

It can be noted that the country's gross domestic product (GDP) shrunk by nearly a fourth in the June quarter as the COVID-19 pandemic fuelled lockdowns chilled all economic activity. The infections continued to increase, making India the second most affected country.

Jain said the modest recovery which we are seeing right now cannot be sustained because of the rising infections and also income uncertainty, which is holding back people from consumption in the economy that relies 60 per cent on consumption.

We are a little bearish as against the consensus and feel that the GDP will contract by 8.6 per cent in FY21 before growing by 10 per cent in FY22, she said.

She also revised down the potential rate of growth in the economy, citing the permanent damage done by the pandemic because of the problems on company balance sheets and the modest policy response to the crisis. She also warned that debt sustainability may become a challenge going ahead.

The fiscal stimulus is of only 1.8 per cent and there is an urgent need for a second round of the same, she said.

India needs a credible fiscal stimulus, she said, adding that the response has to be coupled with reforms.

The government needs to spend on infrastructure development and construction activities, undertake more employment generation act works in both the rural and urban areas and broaden the incentives for manufacturers shifting base to India as part of the global supply chain realignment, she said.

The country is among the few worldover where the brokerage has downwardly reviewed its growth estimate, she said, adding that in many other countries, it is an upward revision from the previous estimates given right after the pandemic began.

There is a rise in savings in the country despite the absence of a corresponding rise in incomes, she said, pointing out that these are precautionary spendings undertaken by cutting expenditure and may be temporary.