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Rising COVID-19 cases: India's FY21 GDP to contract 6%, says report

To arrest the spread of the virus, the Centre first announced a country-wide lockdown in March, which brought economic activities to a standstill

twitter-logoBusinessToday.In | July 27, 2020 | Updated 17:13 IST
Rising COVID-19 cases: India's FY21 GDP to contract 6%, says report

Expecting prolonged restrictions in movements due to rising COVID-19 cases, a foreign brokerage has cut India's FY21 GDP estimate sharply to a contraction of 6 per cent as against 4 per cent earlier. In the "bear case" scenario, if the vaccine against the novel coronavirus is delayed, the GDP contraction can go up to 7.5 per cent, analysts at Bofa Securities have said.

To arrest the spread of the virus, the Centre first announced a country-wide lockdown in March, which brought economic activities to a standstill.

Later, it began a process of unlocking, but localized lockdowns continue because of high number of cases. All the analysts, including those at the Reserve Bank of India (RBI), expect a contraction in GDP in FY21, with some pegging a negative growth of up to 9.5 per cent.

The analysts at Bofa said they now expect the current restrictions to stretch till mid-November because of a spike in the number of cases and added that as per its base case, 1 percentage point of GDP is lost for every month of lockdown.

A base case is the most probable case or expected case. While a bear case means a typically pessimistic case.

"India's daily COVID-19 cases have risen by 5.8x to 48,661 since Unlock 1.0 began in June," it said, adding that both the total number of cases at 1.39 million and the 32,063 deaths are "relatively limited" to the overall population of 1.4 billion.

It also added that despite limitation on the health infrastructure side, the testing has ramped up to 4 lakh a day.

If the global economy has to wait for a vaccine against the virus for a year, India's real GDP will contract by 7.5 per cent in FY21, it said, adding that its earlier estimate on the same was for a 5 per cent contraction.

In response to the sharper contraction in GDP, the RBI will go for further easing in its monetary policy, it said.

It can be noted that the central bank has already delivered rate cuts of 1.15 per cent in two moves since the onset of the pandemic.

The brokerage said high real lending rates, adjusted for core WPI (wholesale price inflation) as a proxy for pricing power, constrain recovery beyond the COVID-19 shock at present.

It said while the nominal Marginal Cost of funding based Lending Rate (MCLR) has come off by 1.05 per cent since March 2019 on RBI easing, the real MCLR has jumped 0.44 per cent, as the WPI dropped to 0.8 per cent in June from 2.3 per cent in March 2019.

The decline in GDP will also impact the fiscal math and the Centre's fiscal deficit will come at 7 per cent (as against a budget target of 3.5 per cent) in the base case scenario, it said.

Also Read: 'Please don't extend loan moratorium': HDFC's Deepak Parekh pleads to RBI Governor Shaktikanta Das

Also Read: RBI Governor Shaktikanta Das highlights 5 bright spots in Indian economy

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