Economy

India Ratings lowers projection of contraction in FY21 to 7.8%

Our Bureau New Delhi | Updated on December 24, 2020 Published on December 24, 2020

This is in line with the revision in projected contraction by RBI, ADB, Fitch

India Ratings & Research (Ind-Ra) on Thursday lowered its estimate for gross domestic product (GDP) contraction during FY 2020-21 to 7.8 per cent from the earlier projection of 11.8 per cent.

This is in line with the revision in the projected contraction by RBI, ADB, Fitch and others. Earlier, RBI lowered the projection for contraction to 7.5 from 9.5 per cent, ADB to 8 per cent from 9 per cent, and Fitch to 9.4 per cent from 10.5 per cent.

Ind-Ra has lowered the contraction projection keeping in mind easing of the Covid-19 headwinds and better-than-expected Q2FY21 (July-August) GDP numbers. However, the question that remains is how sustainable is the recovery witnessed in Q2FY21, as a significant part of the impetus came from the festival and pent-up demand.

Also read: SBI lowers FY21 GDP contraction forecast to 7.4 per cent

Although the headwinds emanating from Covid-19-related challenges are unlikely to go away till mass vaccination becomes a reality, perhaps the economic agents and economic activities not only have learnt to live with it but are also adjusting swiftly to the post Covid-19 world.

Ind-Ra now expects Q3FY21 (October-December) GDP growth to come in at negative 0.8 per cent and Q4FY21 (January-March) GDP growth to turn positive at 0.3 per cent, against its earlier expectation of turning positive in Q4FY22. “The agency expects FY22 growth to be 9.6 per cent, mainly due to the favourable/weak base of FY21,” it said.

The non-contact intensive sectors such as manufacturing/electricity and other utilities, in Q2FY21, recorded positive growth, and the mining and construction sectors saw significant reduction in negative growth. However, the same is not true for contact-intensive services sectors such as trade, hotels, real estate, and tourism; these are likely to remain subdued for some more time due to social distancing norms and risk aversion.

Agriculture has been a bright spot even through the Covid-19-related lockdown period and continues to be so, riding on the back of the favourable 2020 monsoon. Ind-Ra therefore, expects agriculture, industry and services to grow at 3.5 per cent, negative 10.3 per cent and negative 9.8 per cent year-on-year, respectively, in FY21.

Also read: Crisil revises GDP forecast to -7.7% for fiscal 2021

Private consumption, which has been the mainstay of aggregate demand, came under significant pressure in FY20 which got aggravated in FY21 due to Covid-19-related headwinds. Although rural demand, on the back of four consecutive good harvests, is lending support to consumption demand, it is inadequate to compensate for the loss of urban demand. Urban demand, despite gaining some momentum lately, may remain subdued due to the depressed consumer sentiment and lower economic activity/employment generation, the agency said.

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Published on December 24, 2020
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