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India's economic growth to contract by 5.3% in FY 21: India Ratings

India's economic growth to contract by 5.3% in FY 21: India Ratings

Credit rating agency India Ratings and Research expects gross domestic product (GDP) to contract by 5.3 per cent on a year-on-year basis in 2020-21.

This will be the lowest GDP growth in Indian history and the sixth instance of economic contraction, others being in FY58, FY66, FY67, FY73 and FY80; the previous low was negative 5.2 per cent in FY80.

“The disorder caused by the Covid-19 pandemic unfolded with such a speed and scale that the disruption in production, breakdown of supply chains or trade channels and total wash out of activities in aviation, tourism, hotels and hospitality sectors will not allow the economic activity to return to normalcy throughout FY21,” the agency said in a report.

“As a result, besides contracting for the whole year, GDP will contract in each quarter in FY21,” it added.

However, the agency believes that GDP growth would bounce back in the range of 5-6 per cent in the next financial year, aided by the base effect and return of gradual normalcy in the domestic as well as global economy.

“The government of India announced an economic package of Rs 20.97 trillion (10 per cent of GDP) on May 12, 2020 to mitigate the adverse impact of Covid-19 and the related lockdown,” the report said.

“However, Ind-Ra's calculations, excluding the monetary meas ures and existing proposals in the union budget, show that the direct fiscal impact is only Rs 2,145 billion (1.1 per cent of GDP),” it added.

The report said the liquidity enhancing measures announced in the economic package in combination with some of the earlier steps announced by the Reserve Bank of India (RBI) will certainly address the supply-side issues of the economy.

“The Indian, economy even before the Covid-19 related lockdown, was suffering on the demand side, as all the demand drivers, except government final consumption expenditure (GFCE), namely private final consumption expenditure (PFCE), gross fixed capital formation (GFCF) and net exports were floundering,” the report said.

“The lockdown and its impact on economy and livelihoods only aggravated the sagging consumption demand. Ind-Ra believes the government is aware of it; but, the near absence of demand-side measures in the economic package indicates the hard budget constraint facing the government,” it added.

Besides, the agency expects external environment to remain challenging due to the Covid-19 related restrictions coupled with trade friction and protectionist policy pursued by many developed economies..