Icra expects GDP to contract by 20% in June quarter, 2% fall in FY21

After the government announced graded relaxations in the lockdown, domestic rating agency Icra on Monday estimated that the country's GDP might contract by as much as 20 per cent in the June quarter and is expected to overcome some lost ground in the remainder of the year but still close 2020-21 down by up to 2 per cent.

The agency's earlier economic forecast was a range, according to which the GDP may either expand by 1 per cent or contract by 1 per cent in 2020-21.

After keeping the country under a 40-day lockdown to arrest the spread of coronavirus, the government extended the lockdown till May 17 with a slew of relaxations to the unaffected areas in order to kick-start economic activity.

"While the graded relaxations announced by the government will permit the resumption of economic activity, the relatively stringent norms in major urban centres will result in the pace of activity remaining constrained," the agency said.

It said there is a likelihood of mismatches in labour availability and sectors, such as manufacturing, construction, trade, hotels, and transport, which will drag down growth.

"Accordingly, we now expect the Indian GDP (gross domestic product) to contract by 16-20 per cent in Q1FY21 (first quarter of 2020-21), which implies that a full-year contraction of 1-2 per cent is inevitable," it said.

A slew of watchers have been forecasting for a heavy impact on the already sagging growth -- India was supposed to grow at a decadal low in 2019-20 as per official estimates -- because of the COVID-19 pandemic that has chilled all activity.

The government has already announced a Rs 1.7-lakh crore package to fight the COVID-19 crisis, which many feel is not sufficient. Some analysts have also said that over half of the stimulus package was already included in Budget 2020-21 announcements and is not fresh money. Even as many watchers point to the limited financial space available, there are reports that the government is working on a new package.

The Reserve Bank of India (RBI) has cut the key policy rate (repo) by a steep 0.75 per cent and also taken a slew of unusual measures to make liquidity available for the needy sectors of the economy with a view to push growth. RBI Governor Shaktikanta Das has also said that meeting the 3.5 per cent fiscal deficit target will be challenging and the government may miss the budgeted target.