A longer wait for a vaccine against COVID-19 virus may lead to a contraction of up to 7.5 per cent in the Indian GDP in FY21, a foreign brokerage said on Monday. Economists at Bank of America Securities also revised down their base case estimates on the real GDP within a week, and now expect it to contract by 4 per cent because of a drop in economic activity.
It can be noted that multiple efforts to find a vaccine against the dreaded virus are on both globally as well domestically, but no timelines have been announced yet. Many analysts are expecting the Indian economy to contract by 5 per cent in FY21 as a result of the nationwide lockdowns, with some also estimating a contraction of up to 7.2 per cent in the GDP.
"India's real GDP will likely contract by 7.5 per cent if the global economy has to wait for a vaccine discovery for a year," the BofA analysts said, calling this as the "bear case". A base case is the most probable case or expected case. While a bear case means a typically pessimistic case.
The analysts, who were earlier estimating a 5 per cent contraction in the worst case scenario, said every month of lockdown is costing 1 percentage point from a yearly growth perspective for the Indian economy. In response, the Reserve Bank of India (RBI) will cut rates by another 2 percentage points in FY21, they said.
Citing movement on a proprietary indicator on economic activity, it said the indicator fell 20.6 per cent in May after the 29.7 per cent fall in April. Industrial production contracted by 34.7 per cent in May, atop April's 57.6 per cent, it said, estimating the Q1 GDP to contract to 18 per cent.
As the cases of COVID-19 infections have trebled since the country began getting into an unlock phase, the present restrictions will get extended to mid-September as against an earlier projection of mid-August, the economists said, adding a full restart of activities will only be possible by mid-October. Apart from this, several states are imposing localised lockdowns like the ones across many urban centres in Maharashtra.
"As a result, we now expect FY21 GDP to contract by another 1 per cent to 4 per cent," they said. The RBI is estimated to cut rates by 0.75 per cent more in the current fiscal as a base case, the Centre's fiscal deficit will come at 6.85 per cent of GDP as against the budgeted 3.5 per cent and the overall fiscal deficit will be at 10.7 per cent, it said.
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