Steeper fall: India’s GDP to shrink by 9% in FY21: S&P

Global rating agency Standard and Poor’s (S&P) on Monday revised down its forecast of a contraction in India’s real gross domestic product (GDP) to a record 9% in FY21 from 5% announced earlier, suggesting that the continued escalation of the Covid-19 pandemic will likely keep a leash on both private spending and investment for a longer-than-expected period.

With this, S&P joins its peers – Moody’s and Fitch — and other established agencies in predicting a sharper slide in India’s GDP, after the government announced a record 23.9% contraction, the steepest among the G-20 economies, in the June quarter. Last week, Moody’s forecast India’s GDP to shrink by 11.5% in FY21, while Fitch predicted a fall of 10.5% and Goldman Sachs 14.8%.

While most agencies have predicted a recovery in FY22 (S&P projects a 10% expansion next fiscal), some of them have cautioned that it will be greatly aided by a favourable base and a meaningful rebound will take time to materialise. S&P expects a permanent loss of 13% in output over the next three years.

India’s elevated deficits will limit the scope for large fiscal stimulus, while the potential for further support monetary support is curbed by inflation worries, the rating agency said. S&P said: “While fiscal spending increased during the March-June quarter, the targeted fiscal stimulus measures announced so far amounts to about 1.2% of GDP. This magnitude is lower compared with global averages. The International Monetary Fund estimates that on average comparable stimulus measures across global emerging markets have been about 3.1% of GDP.”

The Reserve Bank of India has trimmed the benchmark lending rate by as much as 115 basis points so far in 2020 to 4%. However, retail inflation remained above the Monetary Policy Committee’s tolerance band of 4 (+/-2)% for seven out of the past eight months through July, complicating the central bank’s job.

Despite easing of lockdown curbs since June, the pandemic will continue to weigh on economic activity and that recovery has been more gradual than anticipated, according to the agency. New cases per day in India averaged nearly 90,000 in the week ended September 11, according to data from the World Health Organization. This is up from an average of about 70,000 per day in August. “As long as the virus spread remains uncontained, consumers will be cautious in going out and spending and firms will be under strain,” it pointed out.

The agency said although industrial activity is witnessing a faster recovery than services, leading economic indicators suggest that output is still lower than a year before, so growth for the September quarter will also be negative.

“The larger adverse shock to growth will be driven by corporate balance sheet damage, with small and midsize enterprises closing shop, and larger firms holding back capital expenditure, which will constrain their growth capacity,” it added.