India’s GDP to contract 11% in FY21: ICRA

ICRA has revised its FY21 forecast for the contraction in India’s GDP downwards to 11 per cent from its earlier projection of 9.5 per cent due to fresh Covid-19 infections remaining elevated at the end of Q2 (July-September) FY21.

The credit rating agency cautioned that if the pace of year-on-year (YoY) decline in Q1 (April-June) FY21 gets revised below the initial estimate, after data for the MSME (micro, small and medium enterprises) and less formal sectors becomes available, the overall GDP outcome for FY21 could be even worse than its expectations of an 11 per cent 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, it asdded.

While ICRA expects the economic situation to improve in H2 (October 2020 to March 2021) FY21 relative to H1 (April to September 2020) FY21, it has revised its year-on-year (YoY) forecasts for Q3 (October-December) FY21 (to -5.4 per cent from -2.3 per cent) and Q4 (January-March) FY21 (to -2.5 per cent from +1.3 per cent) relative to its earlier projections.

Aditi Nayar, Principal Economist, ICRA Ltd, said: “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.”

Additionally, the continued economic uncertainty and health concerns would result in a prolonged impact on consumption and investment decisions, she added.

Revenue shock

Further, 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 (capital expenditure) and the release of timely payments, according to ICRA.

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, it added.

Recovery along expected lines

The agency observed that after the expected plunge in Indian GDP (at constant 2011-12 prices) in Q1 FY21, the recovery in Q2 FY21 has broadly evolved along anticipated lines.

ICRA expects the YoY contraction in GDP to narrow considerably to 12.4 per cent in Q2 FY21, from 23.9 per cent in Q1 FY21, in line with its previous forecast.

“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.

“Moreover, the outlook for agriculture appears bright, which should continue to bolster farm demand,” said Nayar.

In addition, 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.

“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 FY21, despite the favourable base effect, resulting in the overall GVA and GDP continuing to record a YoY decline in growth in that quarter,” Nayar added.

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