CARE Ratings has cut its FY2022 GDP forecast for the third time this fiscal, revising it from 10.2 per cent to 9.2 per cent with a downward bias as the second wave of the coronavirus pandemic has dealt a double whammy -- lockdown as well as health of workers.

The credit rating agency’s Economics Department assessed that lower growth in GDP compared to its initial estimate of 11.2 per cent (in March 2021) would mean a loss of ₹ 2.68 lakh crore in real terms or ₹ 3.89 lakh crore in nominal terms, which in turn will also have fiscal implications.

In April, the agency revised its GDP projections downwards twice -- from 11-11.2 per cent to 10.7 per cent on April 5 and to 10.2 per cent on April 21.

Underscoring that the 7- day moving average is still at around 3.90 lakh as of May 10, Madan Sabnavis, Chief Economist, in a report said the concern now is that the infections are spreading to the interiors in most states.

This also means that agriculture, which was isolated from the first wave, can be affected this time though there is not a perceptible impact presently, he added.

As per the report, the spread of infection has also affected workers in various businesses in this round, which is directly affecting companies. Further, supply chains are being affected this time due to workers getting infected unlike the first wave in 2020 when there were restrictions on the movement of goods.

“Under these conditions, we do believe that there will be a push back to the unlock process, which can be only moderate even in July and will pick up only in August assuming the worst is behind us in June.

“In fact, it is assumed that the loss in June and part of July will be comparable to the previous months due to the spread of the virus in the interiors,” opined Sabnavis.

First gear mode in June

Also, based on the progress of the vaccination programme, it does appear that there will be significant delays in meeting targets and the nation will still be in the first gear mode in June, with movement to the second starting earliest in July, he added.

Hence, Q1 (April-June) of this year will be stressed out to a large extent with July showing mixed signs.

Delay in demand revival process

The report said there are 37 lakh active cases today which can be affecting broadly over one crore families. There have been cumulative discharges of around 1.9 crore people which will affect at least 6-7 crore families.

“This can potentially also affect the purchasing power of families and hence unlike last year when the pent-up demand theory worked to a certain extent, this time it will be dormant,” Sabnavis said.

He noted that these people would have spent considerable amounts of money on medical treatment and unless in the top echelons of income would not be in a position to spend more this time after the infection incidence abates.

The sheer numbers this time will delay the demand revival process this year, he added.

Fiscal implications

As per the agency’s estimates, with real GDP growth falling by ₹ 2.68 lakh crore, nominal GDP would now be reduced to ₹ 218.98 lakh crore (from ₹ 222.87 lakh crore), with a loss of nearly ₹ 3.9 lakh crore of income.

Further, with GDP growth slowing down by 2 percentage points (from the first projection of 11.2 per cent made in March 2021 to 9.2 per cent now), the overall tax revenue to the Centre will come down from ₹15.45 lakh crore to ₹15.11 lakh crore, which is a shortfall of ₹34,000 crore.

Referring to the government last month announcing an outlay of ₹ 25,000 crore on account of the free food programme for 80 crore people (which would be at ₹5 kg/month), Sabnavis assessed that this additional cost combined with the potential decline in tax revenue will mean an increase in deficit by Rs 59,000 crore.

“The revised fiscal deficit under ceteris paribus conditions would be Rs 15.66 lakh crore or 7.15 per cent of GDP. This is assuming that the government spends the additional ₹25,000 crore outside the budget and does not channel the same from an existing allocation,” he said.

The report also emphasised that any adverse effect on agriculture due to the spread of infection would necessitate higher MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) spending and every additional ₹10,000 crore spent on this programme can push the GDP up by 0.04 per cent.

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