Major downward revision in full-year GDP forecast by agencies raises alarm
While global ratings agency Fitch Ratings slashed its estimate for India’s growth to a 10.5% contraction in the ongoing fiscal, its domestic arm, India Ratings and Research (Ind-Ra) saw the economy contracting further still at 11.8% in FY21.
The drastic downward revision for both the firms, which was over twice the earlier estimates of -5% by Fitch and -5.3% by Ind-Ra, was due to the worse-than-expected April-June quarter performance of -23.9%.
“After the NSO (National Statistics Office) putting out the first quarter GDP, I think the entire recovery path has shifted southwards,” said Sunil Kumar Sinha, principal economist, Ind-Ra, during a webinar on Tuesday.
The revisions put both firms’ estimates at the lower end of the spectrum, a space earlier occupied by ICRA, which has stuck to its -9.5% forecast for FY21. Other institutions like Nomura and State Bank of India Research also downgraded their projections to -10.8% and -10.9% respectively.
In the September update of its Global Economic Outlook (GEO) released on Tuesday, Fitch raised its expectations for the global economy to -4.4% this calendar year against its June estimate of -4.6%.
This was led by an upward revision for the US to -4.6% growth in 2020 compared to -5.6% before and 2.7% for China against 1.2% Fitch had estimated in June.
However, Fitch saw the Euro area contracting further at 9% for the year compared to 8% earlier on the back of sharper declines expected in the UK (-11.5%), France (-9%), Italy (-10%) and Spain (-13.2%).
For the next fiscal year, Fitch expected growth to bounce back at 11% while Ind-Ra saw a weaker 9.9%. However, the optimism of these figures should be tempered with the low base effect, cautioned DK Pant, chief economist, Ind-Ra.
Terming this as a V-shaped recovery would be incorrect, Pant said, adding, “On a real basis, it is only in the fourth quarter of the next fiscal that the size of the economy will be higher than the size of the economy in the fourth quarter of last fiscal.”
The economy will lose Rs 18.44 lakh crore in FY21, according to Ind-Ra, of which Rs 6.2 lakh crore of wage income and Rs 12.2 lakh crore of corporate profits would be wiped out, according to Pant.
The Fitch report has pegged inflation to settle at 4.4% for the fiscal. “Supply-chain disruptions and excise duties increases have caused prices to rise. However, we expect inflation to slow amid weak underlying demand, an easing in supply-chain disruptions and a good monsoon,” it said.
Just over a percentage point higher, Ind-Ra projected retail inflation at 5.1% and -1.7% wholesale inflation for FY21.
Ind-Ra saw the fiscal deficit rising to 8.2% by the end of the year against the targeted 3.5% of GDP. According to Sinha, this would be due to the combined effect of declining revenue and a 9.1% shrinkage of nominal GDP, which is the denominator for calculating the deficit percentage.