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India's GDP to contract 5.3% in FY21 amid coronavirus impact, will rebound in FY22: Ind-Ra

This would be the lowest GDP growth in India's history (since data became available in FY51) and sixth instance of economic contraction, others being in FY58, FY66, FY67, FY73 and FY80; the previous low was negative 5.2 per cent in FY80

Chitranjan Kumar | June 24, 2020 | Updated 15:01 IST
India's GDP to contract 5.3% in FY21 amid coronavirus impact, will rebound in FY22: Ind-Ra
Ind-Ra predicted contraction in GDP for all the four quarters in FY21

India Ratings and Research (Ind-Ra), a part of Fitch group, on Wednesday forecasted that India's gross domestic product (GDP) will contract 5.3 per cent in financial year 2020-21 (FY21), citing economic disorder caused by the COVID-19 pandemic and nationwide lockdown to control the spread of the deadly virus.

According to Ind-Ra, this would be the lowest GDP growth in India's history (since data became available in FY51) and sixth instance of economic contraction, others being in FY58, FY66, FY67, FY73 and FY80; the previous low was negative 5.2 per cent in FY80.

"The disorder caused by the COVID-19 pandemic unfolded with such a speed and scale that the disruption in production, breakdown of supply chains/trade channels and total wash out 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.

Given the slow pace of economic activity, the ratings agency predicted contraction or negative year-on-year growth in GDP for all the four quarters in the current financial year. The agency, however, expects the GDP growth to bounce back in the range of 5-6 per cent in FY22 on the back of the base effect and return of gradual normalcy in the domestic as well as global economy.

India Ratings also forecasted that India's fiscal deficit may expand more than double to 7.6 per cent of GDP in FY21, compared to budgeted estimate of 3.5 per cent of GDP. The majority of the fiscal slippage will be from the revenue side, it said.

Also Read: Coronavirus effect: India's GDP may contract by 3.1% in 2020, says Moody's

Earlier this week, global rating agencies Fitch and Moody's too had projected contraction in the Indian economy in the current fiscal year due to strict lockdown measures imposed since March 25 to curb the spread of coronavirus. While Fitch expects India's GDP to contract by 5 per cent in the fiscal year ending March 2021, Moody's pegged the contraction at 3.1 per cent in 2020.

On the government's Rs 20.97 lakh crore Atma Nirbhar economic package, Ind-Ra said that the credit and liquidity enhancing measures announced in the stimulus along with some of the earlier steps announced by the Reserve Bank of India (RBI) will certainly address the supply-side issues of the economy.

Also Read: Tensions with China may impact India's medium term outlook: Fitch Ratings

Ind-Ra opined that the external environment continues to remain challenging due to COVID 19 related restrictions coupled with trade friction and protectionist policy pursued by many developed economies. It expects merchandise exports to decline 9.4 per cent yoy in FY21 (FY20: negative 4.9 per cent), as all major export commodities would clock negative growth. Merchandise imports are expected to decline 17.4 per cent yoy in FY21 (FY20: negative 8.9 per cent). As a result, the trade deficit is estimated to decline to a four-year low of $97.7 billion (3.9 per cent of GDP) and current account deficit to $3.3 billion (0.1 per cent of GDP) in FY21. However, Q1 FY21 may see a current account surplus, it added.

From the supply side, agriculture is the only bright spot. Agricultural gross value added (GVA) is expected to grow 3.5 per cent yoy in FY21 amid good monsoon season, it said. The India Meteorological Department in its second stage forecast for Southwest monsoon rainfall has predicted the monsoon rainfall to be 102 per cent of long period average (1961-2010) in 2020.

The industry and services GVA is expected to contract 15.8 per cent and 2.2 per cent, respectively, in FY21.

Ind-Ra expects the retail and wholesale inflation to come in at 3.6 per cent and 1.2 per cent, respectively, in FY21. Inflation in FY21 will be largely governed by monsoon rainfall, global commodity prices especially crude oil and monetary/ fiscal policy pursued by the RBI/ government to mitigate COVID-19.

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