Credit ratings agency India Ratings and Research and investment bank Goldman Sachs, on Tuesday, slashed India’s GDP growth forecast for the year ending March 2021, following a sharper than expected contraction in the April-June quarter economic growth, but both are also expecting a stronger recovery the next year.
India Ratings expects India’s GDP growth to contract 11.8 per cent in 2020-21, compared with the 5.3 per cent contraction it had expected earlier. Goldman Sachs is expecting the GDP to shrink 11.1 per cent in calendar year 2020 and fall 14.8 per cent in the financial year ending March 2021.
India Ratings’ GDP growth forecast at -11.8 per cent will be the lowest GDP growth in India’s history, data for which is available since financial year 1951. India’s previous lowest GDP growth was in the year ending March 1980 at -5.2 per cent.
Sunil Kumar Sinha, principal economist at India Ratings, pointed that India’s first quarter GDP de-growth of 23.9 per cent was much higher than the 17 per cent de-growth the ratings agency had expected due to the impact of the COVID-19 pandemic and the resultant nationwide lockdown. Goldman also cited the June quarter GDP growth, which it said was sharply below expectations, for the downward revision of the full year growth forecast.
“All indicators, be it mobility or consumption, are pointing towards a much weaker economic recovery,” said Sinha.
India began unlocking the economy, beginning June. However, as cases continued to rise, many states imposed localised lockdowns in specific cities and districts in July. This once again disrupted the recovery.
For instance, out of 35 states/union territories, workplace mobility improved only in 16 between end-May and end-August 2020. As the number of COVID-19 infections picked up significantly across India in July, leading to local/regional lockdowns, mobility in many states reduced by end-August from end-June, he said.
“The economic disruption caused by COVID-19 has had a telling impact, not only on the economy but also on jobs and livelihoods. However, it has been more pronounced in the unorganised sector, leading to huge reverse migration. Although there is some evidence of migrant workers returning to urban areas, the process is likely to be slow. Private final consumption expenditure growth therefore is now estimated to clock -12.8 per cent, down from the earlier estimate of -5.1 per cent,” added Sinha.
The lockdown restrictions have been eased further in many states from this month, with some states also allowing metro rail services to restart. However, India’s cases continue to rise. Coronavirus cases in the country rose to 42.80 lakh on Tuesday, while recoveries rose to 33.23 lakh.
“While a second wave of infections is being witnessed globally, India still has not been able to flatten the first wave of infection curve,” noted Sinha.
Despite the gloom this year, both India Ratings and Goldman Sachs are expecting that India’s GDP growth will rebound sharply next year.
India Ratings forecast the GDP growth for the year ending March 2022 at 9.9 per cent, citing the low base effect of this year. Goldman Sachs sees India’s GDP growth in the calendar year 2021 at 9.9 per cent and for the financial year 2021-22 at 15.7 per cent.
“While the economy must now climb out of a deeper trough in 2020, we have upgraded our expectations of a rebound next year. In April-June 2021, we expect real GDP growth to bounce back sharply on a year-over-year basis due to favorable base effects. Assuming 70 per cent of the lost output in June 2020 is recovered in June 2021, we expect real GDP in April-June 2021 at +27.1 per cent year-on-year,” said Prachi Mishra, chief India economist at Goldman Sachs.
Last week, Japan’s Nomura Securities had slashed India’s GDP growth forecast for 2020 to -9 per cent from earlier forecast -5 per cent and for FY2021 to -10.8 per cent, compared with -6.1 per cent it had expected earlier.
“The current weak economic conditions requires a more aggressive fiscal response, but budgeted fiscal support has been limited, while monetary policy is hamstrung due to inflation,” said Sonal Varma, chief India economist at Nomura Securities.
Nomura expect a second round of targeted fiscal support in coming months, although it remains unclear if the government will provide a large scale demand stimulus, said Varma.
