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Sunday, April 11, 2021

Nationwide lockdown may shrink India’s GDP, say forecasters

Nationwide lockdown may shrink India’s GDP. The Coronavirus lockdown has brought India’s economic activity to a standstill and the future sure looks bleak. Adding to that the latest economic forecasts and assessments by several domestic and global agencies have reinforced fears of a sharper de-growth in the upcoming days or month. What does it mean for India’s economy?

After a lot of number crunching, Fitch ratings, CRISIL, and SBI Research have drastically cut down the country’s economic growth forecast in the current fiscal year due to the prolonged and unprecedented COVID-19 lockdown. While both Fitch and CRISIL projected the Indian economy to contract five per cent, from their earlier estimates of the economic growth at 0.8 per cent and 1.8 per cent, respectively, SBI Research slashed economic contraction to 6.8 per cent from the earlier 4.7 per cent. These estimates by these agencies also seem to be in line with most foreign research houses, which first delivered the shocker in May 2020 that India is on course to witnessing its worst recessions this fiscal year. So what to each of these reports say and mean for India’s economy?

What does the SBI report say?

The contraction in the Q1 FY21 GDP might go up to almost 40 per cent, said the SBI Ecowrap report. Stating the possibility of a smart recovery in the Q2 GDP of at least a 7.1 per cent on the back of the country’s ability to sustain the demand, SBI Chief Economist Soumya Kanti Ghosh said that GDP loss in Q1 FY21 will be colossal and could even exceed the expected 40 per cent. The SBI report also expects another economic stimulus package from the Central Government in the latter part of 2020 to shore up the country’s economy. The SBI research expects the COVID-19 virus spread to face an evident increase in the last week of June. “The good news is that Q2GDP growth in FY21 could see a bump up because of a significant contraction in Q1GDP,” said SBI Chief Economist Soumya Kanti Ghosh. However, he also added that such a significant bump could “rapidly degenerate in a low equilibrium with income and job losses acting as a drag on consumption. We thus believe the government might be looking at the data more closely to prevent such loss in momentum in Q3 and Q4 and even come up with another targeted package later in the year.”

The SBI report calculated the GDP growth taking a bottom-to-top approach than earlier which was a top-to-bottom one. As such, group chief economic advisor of SBI also estimated the district-wise, zone-wise loss in GSDP for each state in the country and found that total GSDP loss due to COVID-19 for states stands at Rs 30.3 lakh crore, which is 13.5 per cent of total GSDP. The reasoning the report gave was that the states are starting economic activities in a staggered manner. The total loss that the states face due to COVID-19, 90 per cent was accounted for by red and orange zones, which mainly included urban areas. On the state losses, the report said the top 10 contributed to 75% of the total, with Maharashtra at 15.6%, followed by Tamil Nadu at 9.4% and Gujarat at 8.6%. These states also have the highest number of positive cases. The report also stated that the number of infections will go down gradually after reaching a peak in June.

Nationwide lockdown may shrink India's GDP
Downturn financial chart with Coronavirus representing the stock market crash caused by the pandemic (photo: shutterstock.com/Creativa Images)


What does the CRISIL report say?

Meanwhile, the rating agency CRISIL said it expected the current quarter’s GDP to shrink 25 per cent year on year. In its latest report, CRISIL said it would really be a long and tiring road to recovery and going back to the pre-COVID-19 trend level of gross domestic product in India might not be possible for at least the next three fiscal years. The unprecedented extension of the COVID-19 lockdown, higher economic costs, and an economic stimulus package that lacked muscle are the three key reasons why CRISIL has downgraded the GDP forecast. “The economic costs, now beginning to show up in the hard numbers, are far worse than our initial expectations. Given one of the most stringent lockdowns in the world, April could well be the worst-performing month for India this fiscal year,” it said. Though CRISIL expects non-agricultural GDP to contract six per cent, agriculture could maybe take the blow by growing at 2.5 per cent in FY21, CRISIL stated.

“CRISIL forecasts India’s GDP growth to fall off a cliff and contract 5 per cent in fiscal 2021. Earlier, on April 28, we had slashed our prediction to 1.8 per cent growth from 3.5 per cent growth. Things have only gone downhill since. While we expect non-agricultural GDP to contract 6 per cent, agriculture could cushion the blow by growing at 2.5 per cent,” the report said.

CRISIL also said in its report that the recession in the current fiscal (April 2020 to March 2021) is different as agriculture could soften the blow this time, “The first quarter of this fiscal will be the worst affected,” it said. “Not only will the first quarter be a washout for the non-agricultural economy, services such as education, and travel and tourism among others could continue to see a big hit in the quarters to come. Jobs and incomes will see extended losses as these sectors are large employers,” it added.


What does the Fitch report say?

“The pandemic has drastically weakened India’s growth outlook and laid bare the challenges caused by a high public-debt burden. After the global crisis, India’s GDP growth is likely to return to higher levels than ‘BBB’ category peers, provided it avoids further deterioration in financial sector health as a result of the pandemic,” Fitch Ratings said in its APAC Sovereign Credit Overview. Fitch had in December 2019 confirmed India’s sovereign ratings.

The agency said that there has been a significant rise in the fiscal deficit. This could increase the gross general government debt to GDP ratio and loosen the preexisting macroeconomic policy settings. “General government debt already stood at 70 per cent of GDP in 2019-20, according to our estimate, well above the ‘BBB’ median of 42 per cent,” Fitch said, adding that it expects India’s ratio of public debt to GDP to rise to 84 per cent of GDP in the current fiscal.

“This is based on our expectation of slower economic growth in 2020-21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained,” it said. The stimulus measures announced by the government amount to 10 per cent of GDP but the fiscal component in it is just 1 per cent of the GDP. Which, Fitch said, is significantly less than many of the other countries.

Recently, RBI Governor Shaktikanta Das had also said that India’s GDP will shrink in the current fiscal year. As the economy has begun reopening with the lockdown easing, let’s hope the GDP growth will take its course eventually.

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