Indian economy to shrink 9 pc in FY21: ADB

ADB joins a chorus of international agencies that have predicted a contraction in the Indian economy in the current fiscal. S&P Global Ratings on Monday slashed its FY21 growth forecast for India to (-) 9 per cent, from (-) 5 per cent estimated earlier, saying that rising COVID-19 cases would keep private spending and investment lower for longer.

India's coronavirus-battered economy will shrink by 9 percent this fiscal, the Asian Development Bank (ADB) predicted on Tuesday saying growth outlook remains highly vulnerable to either a prolonged outbreak of the pandemic or a resurgence of cases. This will be the first time in four decades that the Indian economic growth will contract.

In its Asian Development Outlook (ADO) 2020 Update, ADB forecasts a strong recovery for the economy in FY2021, with the gross domestic product (GDP) growing by 8 percent as mobility and business activities resume more widely. "India imposed strict lockdown measures to contain the spread of the pandemic and this has had a severe impact on economic activity," said ADB Chief Economist Yasuyuki Sawada.

Sawada further noted that "it is crucial that containment measures, such as robust testing, tracking, and ensuring treatment capacities, are implemented consistently and effectively to stop the spread of COVID-19 and provide a sustainable platform for the economy's recovery for the next fiscal year and beyond." With lockdowns stalling private spending, ADB said GDP will shrink by 9 percent in April 2020 to March 2021, sharply down from its June's forecast of (-) 4 percent. "The growth outlook remains highly vulnerable to either a prolonged outbreak or a resurgence of cases, with the country now having one of the highest numbers of COVID-19 cases globally," It said.

Other downside risks include increasing public and private debt levels that could affect technology and infrastructure investment, as well as rising non-performing loans caused by the pandemic that could further weaken the financial sector and its ability to support economic growth. ADB joins a chorus of international agencies that have predicted a contraction in the Indian economy in the current fiscal.

S&P Global Ratings on Monday slashed its FY21 growth forecast for India to (-) 9 percent, from (-) 5 percent estimated earlier, saying that rising COVID-19 cases would keep private spending and investment lower for longer. Last week, two other global rating agencies Moody's and Fitch projected the Indian economy to contract 11.5 percent and 10.5 percent respectively in the current fiscal. However, Goldman Sachs has estimated the contraction at 14.8 percent.

India Ratings and Research expect contraction at 11.8 percent, while Crisil estimates the contraction at 9 percent. For the 2021-22 fiscal, S&P expects economic growth at 10 percent.

ADB said Government initiatives to address the pandemic, including the rural employment guarantee program and other social protection measures, will aid rural incomes protecting the vulnerable people, but private consumption may continue to suffer. Investment is also expected to contract as investors remain deterred by heightened risks and uncertainties. The fiscal deficit is expected to rise significantly in FY2020 as government revenues fall and expenditures rise.

The government also initiated reforms in response to the COVID-19 pandemic focusing on enhancing agriculture markets, upgrading industrial park infrastructure, and implementing the National Infrastructure Pipeline. "These efforts will promote foreign investment, incentivize global supply chains to reallocate to India, and create manufacturing hubs across the country. Financial support to low-income groups and small businesses can also help revive the economy more inclusively," it said.

Inflation is expected to fall in the remainder of 2020-21 to 4.5 percent with tamed food prices and decreased economic activity, and then further decline to 4 percent in the next fiscal. India's current account deficit is forecast to shrink to 0.3 percent of GDP this fiscal year, then widen to 0.6 percent of GDP in FY22 with exports expected to recover as global growth rebounds.

For Developing Asia, ADB forecasts a 0.7 percent decline in the GDP in 2020. The contraction this year would be the first since 1962. China is however forecast to buck the trend with a 1.8 percent growth this year. Its growth is forecast to accelerate to 7.7 percent in 2021.

Developing Asia excludes advanced nations like Japan.