Rating firms rework their India FY21 GDP forecasts with sharper contraction

Impact on wages to severely dent consumption and decelerate recovery, says India Ratings

Global and domestic rating agencies have sharply cut their forecast for India’s economic growth this fiscal year, after the official data showed a sharper-than-expected GDP contraction in the June quarter and sluggish recovery in indicators thereafter.

Fitch now expects India’s GDP to contract 10.5 per cent in FY21, compared to its earlier estimate of 5 per cent. India Ratings, its wholly-owned Indian subsidiary, predicts a sharper fall of 11.8 per cent in real GDP.

Goldman Sachs, which had earlier estimated an 11.8 per cent contraction, has now estimated it at 14.8 per cent.

India’s real GDP contracted by a record 24 per cent in Q1, beating the average estimate of 18-20 per cent.

“The severe fall in economic activity has damaged household and corporate incomes and balance sheets, amid limited fiscal support. The looming deterioration in asset quality for the financial sector will hold back credit provision,” said Fitch.

However, domestic and global agencies are not on the same page when it comes to speed of recovery. While Fitch expects the economy to rebound strongly in Q2, India Ratings predicts contraction in all four quarters of FY21, expecting a rebound only in FY22. It has projected 9.9 per cent growth in real GDP during FY22, mostly due to a favourable base effect.  

Predicting a sharper recovery, Goldman Sachs has pegged real GDP growth at 15.7 per cent in FY22, and a massive 27.1 per cent in the June 2021 quarter.

“Real output in March 2022 will still be around 2 per cent below the March 2020 level,” said Prachi Mishra and Andrew Tilton of Goldman Sachs in a note.

At the same time, Fitch expects global GDP to fall 4.4 per cent in 2020, a modest upward revision from the 4.6 per cent expected earlier.

“Recovery in economic activity has been swifter than anticipated. China has already regained its pre-virus GDP levels and retail sales in the US, France, and the UK now exceed February levels,” Fitch wrote about global economic recovery.

“But we doubt this will become the much-lauded V-shaped recovery. Unemployment shocks lie ahead in Europe, firms are cutting capex, and social distancing continues to restrict private-sector spending,” said Brian Coulton, chief economist at Fitch Ratings.

India Ratings now expects a dent of 9.1 per cent in India’s nominal GDP, against its earlier estimate of 3.4 per cent. This would take FY21 nominal GDP down to Rs 1.85 trillion, lower than the FY19 level of Rs 1.9 trillion.

“Only in Q3FY22 will India’s nominal GDP be higher than Q4FY20 — a loss of nearly two years,” said Devendra Pant, chief economist, India Ratings.

He added that wages occupied a third of the nominal GDP. “A washout of Rs 18.5 trillion in nominal GDP translates to the vanishing of Rs 6 trillion worth of wages.”

A loss of a tenth in nominal GDP will result in poor revenue collection, and considerably enlarge the fiscal deficit, which the agency has pegged at 8.2 per cent of GDP for FY21.

“However, directly monetising the deficit should be the last option, only after other avenues — borrowing from domestic markets and multilateral agencies, and assistance from the International Monetary Fund — are exhausted,” said Sunil Kumar Sinha, principal economist at India Ratings.

Meanwhile, ICRA has kept its GDP growth forecast unchanged at -9.5 per cent. CRISIL is also expected to revise its forecast soon.