Rating firms rework their India FY21 GDP forecasts with sharper contraction

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


Rating agencies | GDP | India GDP

Global and domestic rating agencies have sharply cut their forecast for India’s economic growth this fiscal, after official data suggested a sharper-than-expected contraction in gross domestic product in the quarter ending June (Q1), and a sluggish recovery in economic indicators thereafter.

New York-headquartered ratings agency Fitch expects the country’s GDP to contract 10.5 per cent in FY21 versus its earlier estimate of 5 per cent. India Ratings, the Indian subsidiary of Fitch, predicts a sharper fall of 11.8 per cent in India’s real GDP.

Investment bank Goldman Sachs’ forecast goes further south to estimate a 14.8 per cent contraction in India’s GDP in FY21, against the 11.8 per cent forecasted earlier. India’s real GDP contracted by a record 24 per cent in Q1, beating the average analyst expectation of 18-20 per cent fall.

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

But the point where domestic and global agencies differ, is the speed of recovery. While Fitch expects the economy to rebound strongly in the Q2 FY21 as the economy re-opens, India Ratings predicts contraction in all four quarters of FY21. However, Fitch does caution that the recovery has been sluggish and uneven.

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India Ratings thinks the rebound will happen in FY22, and pegs the real GDP growth in the upcoming financial year at 9.9 per cent, mostly due to favourable base effect.

Again predicting a sharper recovery, Goldman Sachs pegs real GDP to grow 15.7 per cent in FY22, and a massive 27.1 per cent in the June quarter of 2021.

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

As it revises India’s GDP growth estimate downward, Fitch expects global GDP to fall by 4.4 per cent in 2020, a modest upward revision from the 4.6 per cent decline expected earlier.

“The recovery in economic activity after the unprecedented severe coronavirus-related recession in March and April has been swifter than anticipated. China has already regained its pre-virus level of GDP 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 directly constrain private-sector spending”, said Brian Coulton, chief economist, Fitch Ratings.

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

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“Only in the third quarter of FY22, will India’s nominal GDP be bigger than that in Q4 FY20—a loss of nearly two years,” said Devendra Pant, chief economist at India Ratings.

He also said that wages occupy a third of the nominal GDP. “A washout of Rs 18.5 trillion in nominal GDP translates into wages worth Rs six trillion vanishing. This will have a debilitating impact on consumption.”

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

“But directly monetising the deficit should be the last option, to be used only when other avenues such as borrowing from domestic market, multilateral agencies, and assistance from the likes of International Monetary Fund, are exhausted,” Sunil Kumar Sinha, principal economist at the agency said.

Domestic agency Icra has kept its GDP growth forecast unchanged at negative 9.5 per cent. Crisil is expected to revise its forecast soon.

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