State Bank of India’s economic research department has lowered India’s FY21 GDP contraction forecast to 7.4 per cent against earlier forecast of 10.9 per cent contraction, based on better than expected recovery.

The Department believes that it will take almost seven quarters from Q4 (January-March) FY21 to reach the pre-pandemic level in nominal terms and there will be a permanent output loss of around 9 per cent of GDP.

The total output loss (in nominal terms) was ₹13-lakh crore for Q1 (April-June) and Q2 (July-September) put together, it added.

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The bank’s revised GDP estimates are based on SBI ‘Nowcasting Model’ with 41 high frequency indicators associated with industry activity, service activity, and global economy.

Based on this model the GDP growth forecast for Q3 (October-December 2020) would be around 0.1 per cent (with downward bias), the Department said in its research report “Ecowrap”.

Additionally, out of the 41 high frequency leading indicators, 58 per cent are showing acceleration in Q3.

“Positive momentum of various economic indicators including RTO (regional transport office) transactions, revenue collection at RTO, revenue earning of freight traffic, weekly food arrival, petrol and diesel consumption continued in November.

“Even our business activity index which is based on high frequency indicators show improving momentum after a modest decline in the week of Diwali,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

The report projected FY22 GDP growth at 11 per cent primarily due to base effect. However, all projections are conditional on the absence of another wave of infections.

Even as growth outlook has improved, the decline in government expenditure has been quite significant to ₹3.62-lakh crore in Q2 (July-September) FY21 from ₹4.86-lakh crore in Q1 (April-June) FY21, according to Ecowrap.

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The revenue and capital expenditure both declined in Q2 compared to Q1, with larger decline witnessed in revenue expenditure (-19.5 per cent Quarter-on-Quarter/QoQ compared to -12.1 per cent QoQ in capital expenditure), it added.

Moreover, October data shows further decline in overall expenditure compared to September.

“We believe that a large part of fiscal expenditure by the government has been indirect and are off balance sheet items. For example, the free foodgrains distribution to poor through PDS might be taken as off balance sheet adjustment with FCI.

“This gives us hope that the government might be able to spend in Q4 to resurrect growth further. We are also revising our fiscal deficit estimates for FY21 at 8 per cent of GDP,” Ghosh said.

As per the May 2020 Ecowrap report, the Baseline Fiscal Deficit (excluding Extra Budgetary Resources) was revised to 7.9 per cent of the revised GDP in FY21 (from 3.5 per cent earlier) owing to lower revenues and higher expenditure against the backdrop of Covid-19 pandemic.

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