ICRA: FY2021 GDP contraction revised downwards to 11.0% from 9.5%, owing to continued spread of Covid-19 pandemic

ICRA
ICRA has revised its forecast for the contraction in Indian GDP in FY2021 (at constant 2011-12 prices), to 11.0% from its earlier assessment of 9.5%, with fresh Covid-19 infections remaining elevated at the end of Q2 FY2021. While ICRA expects the economic situation to improve in H2 FY2021 relative to H1 FY2021, the agency has revised its year-on-year (YoY) forecasts for Q3 FY2021 (to -5.4% from -2.3%) and Q4 FY2021 (to -2.5% from +1.3%) relative to its earlier projections.

ICRA cautioned that if the pace of YoY decline in Q1 FY2021 gets revised below the initial estimate, after data for the MSME and less formal sectors becomes available, the overall GDP outcome for FY2021 could be even worse than the ratings agency’s expectations of an 11.0% contraction. Nevertheless, higher government spending, a faster global recovery, and an early decline in fresh Covid-19 cases could impart an upside to these forecasts.

According to Aditi Nayar, Principal Economist, ICRA Ltd: “With the pandemic continuing in India for over six months, we sense that economic agents are now adapting to the crisis, resulting in a graduated recovery to a new post-Covid normal. Nevertheless, with rampant Covid-19 infections, we expect behaviours to remain altered for longer than what we had earlier presumed. This would continue to depress activity in some sectors, especially where social distancing is difficult such as travel, tourism and recreation. The continued economic uncertainty and health concerns would result in a prolonged impact on consumption and investment decisions.”

The revenue shock being experienced by the Central and the state governments would limit the extent of fiscal support that may be forthcoming and result in protracted fears about deferral of both the capex and the release of timely payments. Moreover, fresh restrictions being imposed in major trading partners following a new wave of Covid-19 cases, could cap the extent of further improvement in exports in the near term.

After the expected plunge in Indian GDP (at constant 2011-12 prices) in Q1 FY2021, the recovery in Q2 FY2021 has broadly evolved along anticipated lines. “There are some early green shoots, such as the sharp revival in passenger vehicles and motorcycles, but those seem to be driven by pent up demand as well as inventory restocking, casting some doubts on their sustainability. The outlook for agriculture appears bright, which should continue to bolster farm demand. Many sectors have witnessed activity stabilising at levels that are moderately below their pre-Covid performance, a trend which may entrench over the next two quarters, before a further substantial uptrend materialises. However, there have been some slippages as well, such as the worsening pace of contraction of electricity generation, crude oil and refinery output, diesel consumption and non-oil merchandise exports, reinforcing the view that the return to normalcy will not be smooth,” Nayar said.

ICRA expects the YoY contraction in GDP to narrow considerably to 12.4% in Q2 FY2021, from 23.9% in Q1 FY2021, in line with its previous forecast. Given the unabated rise in Covid-19 infections in India, the agency has revised its projections for Q3 FY2021 and Q4 FY2021. ICRA now expects a deeper contraction of 5.4% in Q3 FY2021 and a continued de-growth of 2.5% in Q4 FY2021, implying a full year contraction of 11.0%.

Nayar added that “We expect construction as well as trade, transport, hotels, communications and services related to broadcasting to recover with the longest lag and continue to underperform the rest of the economy. We believe the gross value added (GVA) at basic prices for these sectors would record a contraction even in Q4 FY2021, despite the favourable base effect, resulting in the overall GVA and GDP continuing to record a YoY decline in growth in that quarter.”

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