Raters see India's GDP contracting more in FY21 than projected earlier

Prescribe demand booster dose from govt, but many say that's unlikely to come

Major rating agencies have raised their projections of the contraction of India’s economy in the current fiscal year, with some anticipating a double-digit fall after gross domestic product (GDP) declined 23.9 per cent in April-June. 

They suggested the government come up with fiscal stimuli to spur demand. However, some doubted if the government would do so, given the pressure on the fiscal deficit owing to declining tax collection and low GDP.

Nomura revised its projection for GDP fall to 10.8 per cent against the 6.1 per cent it said earlier.

“Looking ahead, high frequency indicators have improved so far in Q3 (of 2020), but the sequential pace of activity normalisation is moderating, as India continues to struggle in flattening its pandemic curve,” Nomura said in its latest note.

Nomura said the current weak economic conditions required a more aggressive fiscal response, but budgeted fiscal support had been limited, while monetary policy was hamstrung due to inflation.

“Given our expectation that the current inflationary pressures will eventually ebb, we maintain our outlook of cumulative 50 basis points of rate cuts by the Reserve Bank of India (RBI), starting from December. We also expect a second round of targeted fiscal support in coming months, although it remains unclear if the government,” it said.

It expects a coordination of fiscal and monetary policies because the Reserve Bank of India endeavours to keep yields on long-term government bonds low.

SBI Research has projected the economy will fall by 10.9 per cent in FY21 against its earlier estimate of 6.8 per cent.

SBI group Chief Economic Advisor Soumya Kanti Ghosh said the Q2 decline too would be in double digits. 

“Our preliminary estimate indicates that all the four quarters of FY21 will exhibit negative real GDP growth, and the decline of full-year growth will likely be in double digits,” he said.

Ghosh said sectors such as construction, trade and hotels, and aviation needed to be revived. 

“Restoring transportation services and giving a push to infrastructure by issuing special bonds to the RBI must be explored, apart from supporting the states through fiscal measures,” he said.

Motilal Oswal Institutional Equities revised its forecast for GDP decline to 5.2 per cent for FY21 from its earlier projection of 4.7per cent.

It expected GDP to contract by 4.5 per cent in the second quarter, grow by 1.3 per cent in the third quarter, and 5 per cent in the fourth quarter.

Bank of Baroda Economics Research expects the economy to decline by 6.8 per cent in FY21 against its earlier forecast of 5 per cent. 

It attributed this to higher than anticipated fall in GDP during Q1 and continued localised lockdowns in Q2.

India Ratings Chief Economist Devenedra Pant said the agency would revise its projection of GDP contraction for FY21 from the earlier 5.3 per cent. However, Ind-Ra is yet to come up with the revised figures, he said, adding, the government should come up with a demand stimulus.

ICRA Principal Economist Aditi Nayar, however, said the rating agency would retain its forecast of GDP fall at 9.5 per cent. 

“With the Q1 numbers nearly in line with our forecast, we are maintaining our projection for FY21. This builds in narrowing de-growth in Q2 and Q3, followed by marginal growth in Q4,” she said. 

ICRA had projected the economy to fall by 25 per cent in the first quarter.

CARE Ratings Chief Economist Madan Sabnavis maintained the growth contraction at 6.4-6.5 per cent.  He said the government should spend more to boost demand, but that was unlikely to happen.