Indian economy will shrink 5% in FY21, stimulus not enough: S&P Ratings

The rating agency said growth will rebound to 8.5 per cent in 2021-22

S&P Global Ratings on Monday said Indian economy will shrink 5 per cent in the current fiscal, saying the fiscal stimulus worth 1.2 per cent of GDP will not be enough to provide significant growth support.

In a report on emerging markets titled 'Financial Conditions Reflect Optimism, Lockdown Fatigue Emerges', S&P said the services sectors, which are large employers, have been severely affected, leading to widespread job losses.

"Migrant workers have been geographically displaced, and we expect it will take some time to unwind this process. There will be supply chain disruptions over the transition period," S&P said.

The rating agency forecast Indian economy to shrink by 5 per cent in the current fiscal and said growth will rebound to 8.5 per cent in 2021-22. It projected growth to be 6.5 per cent in 2022-23.

India's GDP growth slumped to a 11-year low of 4.2 per cent in 2019-20.

"The central bank has cut policy rates by 115 basis points since February, but policy traction remains low as banks remain unwilling to lend. New direct fiscal stimulus worth 1.2 per cent of GDP won't be enough to provide significant growth support," S&P said.

Rating agencies Fitch and Crisil too had projected a 5 per cent contraction of Indian economy, while Moody's forecast economy to shrink by 4 per cent. World Bank too estimates Indian economy to contract 3.2 per cent in 2020-21.

The government had last month announced a Rs 20.97 lakh crore economic package, which include liquidity support from the RBI.

S&P had earlier said that the government's stimulus package, with a headline amount of 10 per cent of GDP, has about 1.2 per cent of direct stimulus measures, which is low relative to countries with similar economic impacts from the pandemic. The remaining 8.8 per cent of the package includes liquidity support measures and credit guarantees that will not directly support growth.