India Ratings & Research (Ind-Ra), a Fitch group company, on Wednesday estimated the Indian economy would contract by 5.3 per cent during the current fiscal year ie FY 2020-21. If it happens, this will be the second contraction in the history of the country’s GDP data collection, since FY 1950-51.
Ind-Ra’s estimation is almost similar to the projections by various economic think-tanks, rating agencies and multilateral agencies.
“The disorder caused by the Covid-19 pandemic unfolded with such speed and scale that the disruption in production, breakdown of supply chains/trade channels and total washout of activities in aviation (some activities have started now), tourism, hotels and hospitality sectors will not allow the economic activity to return to normalcy throughout FY21,” Ind-Ra said in a research note.
The agency expects the economy to contract in each of the four quarters. However, just like all other agencies, it also feels that the economy will bounce back during the next fiscal year. This reversal would be possible due to two main reasons — the base effect and return of gradual normalcy in the domestic as well as global economy.
Demand contraction
Taking note of the Atmanirbhar Bharat campaign with the overall outlay of nearly ₹21 lakh crore, the research firm said that the credit and liquidity enhancing measures announced in the economic package in combination with some of the earlier steps announced by the Reserve Bank of India (RBI) will certainly address the supply-side issues of the economy. The Indian economy even before the Covid-19 related lockdown was suffering on the demand side, as all the demand drivers — excepting the government final consumption expenditure (GFCE), private final consumption expenditure (PFCE) — and gross fixed capital formation (GFCF) and net exports were floundering. The lockdown and its impact on economy and livelihoods only aggravated the sagging consumption demand. Ind-Ra believes the government is aware of it; but, the near absence of demand-side measures in the economic package indicates the hard budget constraints on the government.
The agency expects PFCE to contract 5.1 per cent during the current fiscal as against an expansion of 5.3 per cent during the last fiscal year. Even GFCF will contract 17.6 per cent and the investment revival will now be pushed beyond FY22. It will happen due to a combination of various factors such as excess capacity, weak domestic/global demand, stretched/leveraged balance sheets of Indian corporates and, budget constraints leading to reduced government capital expenditure.
From the supply side, agriculture is the only bright spot. Agricultural gross value added (GVA) is expected to grow 3.5 per cent. However, the industry and services GVA is expected to contract 15.8 per cent and 2.2 per cent, respectively, during the current fiscal year.
The agency expects the retail and wholesale inflation to come in at 3.6 per cent and 1.2 per cent. The fiscal deficit of the Central government in FY21 is expected to be more than double (7.6 per cent of GDP) the budgeted amount (3.5 per cent of GDP). The majority of the fiscal slippage will be from the revenue side.