ADB cuts India's FY21 contraction forecast to 8% on back of faster recovery

The Asian Development Bank (ADB) on Thursday upgraded its forecast for the Indian economy, projecting 8 per cent contraction in 2020-21 as compared to 9 per cent degrowth estimated earlier, on the back of faster than expected recovery.

Observing that the economy has begun to normalise, the Asian Development Outlook (ADO) Supplement said the second quarter contraction at 7.5 per cent was better than expected.

The economy contracted by 23.9 per cent in June quarter of the current fiscal on account of the impact of the coronavirus pandemic.

"The GDP forecast for FY2020 is upgraded from 9.0 per cent contraction to 8.0 per cent, with GDP in H2 probably restored to its size a year earlier. The growth projection for FY2021 is kept at 8.0 per cent," it said.

Highlighting that India is recovering more rapidly than expected, the report said the earlier South Asia forecast of 6.8 per cent contraction is upgraded to (-)6.1 per cent in line with an improved projection for India.

Growth will return in 2021-22, at 7.2 per cent in South Asia and 8 per cent in India, it added.

Earlier this month, Reserve Bank Governor Shaktikanta Das had said the economy is recuperating faster than anticipated and growth rate is likely to turn positive in the second half of the current financial year.

In the year as whole, the economy is likely to contract by 7.5 per cent, which is an improvement over Reserve Bank's previous projection of 9.5 per cent contraction, Das had said while unveiling the bi-monthly monetary policy review.

Observing that the prospects of growth have brightened with the progress on the vaccine front, Das said, the economy was likely to record a growth of 0.1 per cent in Q3 and 0.7 per cent in Q4.

With regard to inflation, ADO said, it is expected to ease in the coming months, and the 4 per cent update projection for 2021-22 is maintained.

In India, supply chain disruption brought food inflation to an average of 9.1 per cent in the first 7 months of 2020-21, pushing headline inflation to 6.9 per cent in the same period, it said.

As a result, ADO revised India's inflation from 4.5 per cent to 5.8 per cent for the current fiscal.