India's GDP likely to contract by 6.4% in FY21, says Care Ratings

Care Ratings on Thursday revised India's GDP growth forecast for the current financial year to (-) 6.4 per cent as economic activity continues to be under restriction due to the lockdown on account of the Covid-19 pandemic.

The rating agency, in May, had projected a decline in GDP growth of 1.5-1.6 per cent in FY21.

It said given that the nation is into a lockdown for July too with several restrictions on resumption of services in particular as well as movement of people, the cutoff date for normalcy will spread into the latter part of the third quarter and more likely to the fourth quarter.

"Under these assumptions our forecast for GDP growth is now (-) 6.4 per cent for FY21 with GVA (de)growth estimated to be around (-) 6.1 per cent, Care Ratings said in a report.

The sharper fall in real GDP also means that the nominal GDP for the year will also decline assuming inflation of 5 per cent which in turn will affect the projected fiscal deficit number of the central government which will be in the region of 8 per cent for FY21, it said.

In FY20, the country's economy grew at an estimated 4.2 per cent, almost a decade low.

It, however, said the positive growth will come from only agriculture and the government sector.

The agency's May estimate for a decline in GDP growth of 1.5-1.6 per cent was based on the assumption that the lockdown would be ending by the month-end and that the recovery process will be gradual and be calibrated across sectors with the second half being closer to normal.

GDP forecasts for FY21 are unique as they would be varying depending on the evolving situation and the assumptions being made on the recovery process in the country, the report said.

The agency said its assumption now is that two-third of the economic sectors would broadly be operating at 50-70 per cent capacity by the end of third quarter and the balance may not even reach this state this year.

Services like hospitality, tourism, entertainment, travel would take a much longer time pan India to resume anywhere close to normal with interstate restrictions being the norm for the next quarter or so, the report said.

"The restriction on movement of people translates into fall in demand for goods and services and further exacerbates the low-consumption growth syndrome that pervaded for three years now, it said.

Job losses and pay cuts will add to the stickiness in spending even during the festival time, the agency said adding, It is assumed that good rural income cannot compensate for this loss of purchasing power which is topped with uncertainty.