February 28, 2024

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Delighting finance buffs

India’s GDP growth to touch historic low in FY21: Ind-Ra

Ratings agency India Ratings and Research (Ind-RA) expects gross domestic product (GDP) to contract 5.3 per cent in the fiscal year 2020-21. Ind-RA said this will be the lowest GDP growth recorded in Indian history since such data was collected 1950-51 and sixth instance of economic contraction.

The others being in FY58, FY66, FY67, FY73 and FY80; the previous low was a contraction of 5.2{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} recorded 40 years ago in FY80.

According to data released by the agency, this dip in GDP can be attributed to the disorder caused by the Covid-19 pandemic. In India’s context, the disruption severely affected production, breakdown of supply chains/trade channels and total washout of activities in aviation, tourism, hotels and hospitality sectors.

The negative impact of the coronavirus lockdown will not allow the economic activity to return to normalcy throughout FY21, said India Ratings. It predicts a contraction in GDP for all quarters of FY21.

However, the agency believes the GDP growth would bounce back in the range of 5-6 per cent in FY22, aided by the base effect and return of gradual normalcy in the domestic as well as the global economy.

Prime Minister Narendra Modi had earlier announced ‘Atma Nirbhar Package’ of 20 lakh crore on May 12 to mitigate the adverse impact of Covid-19 lockdown.

However, Ind-Ra’s calculations — excluding the monetary measures 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).

Slump in consumer demand

Data furnished by the agency shows that the government took steps to enhance credit and liquidity measures through the economic package in combination with some of the earlier steps announced by the Reserve Bank of India (RBI).

But the Indian economy was suffering on the demand side as well. 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 struggling even before the Covid-19 related lockdown.

The lockdown and its impact on the economy and livelihoods only aggravated the sagging consumption demand.

Ind-Ra believes the government is aware of it, but the absence of demand-side measures in the economic package indicates the hard budget constraints it faces.

Challenging global outlook

The external environment also continues to be challenging due to Covid-19 related restrictions coupled with trade friction and the protectionist policy pursued by many developed economies.

Ind-Ra expects merchandise exports to decline 9.4 per cent on a year-on-year basis in FY21 as all major export commodities would clock negative growth.

Agriculture only bright spot

From the supply side, agriculture is the only bright spot.

Agricultural gross value added (GVA) is expected to grow 3.5 per cent in FY21.

The India Meteorological Department in its second stage forecast for Southwest monsoon rainfall has predicted the monsoon rainfall to be 102 per cent of long-period average (1961-2010) in 2020.

The industry and services GVA is expected to contract 15.8 per cent and 2.2 per cent, respectively, in FY21.

Govt revenues to drop

Fiscal deficit of the central government in FY21 is expected to be more than double the budgeted amount (3.5 per cent of GDP) at 7.6 per cent.

The majority of the fiscal slippage will be from the revenue side. With both GST and other revenue streams drying up, the government’s revenues will be low and could constrain expenditure activities.

In such a scenario, the economic recovery from the present situation could take longer.

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