Ind-Ra revises FY21 GDP contraction to 7.8% on easing pandemic headwinds

Citing the better-than-expected recovery in the second quarter and the faster than anticipated easing of the pandemic headwinds, India Ratings on Thursday projected 7.8 percent contraction for the economy for 2020-21 as compared to 11.8 percent degrowth estimated earlier. But the agency was quick to question the sustainability of the recovery seen in the September quarter when the Indian economy contracted only 7.5 percent, after 23.9 contractions in April-June, saying ''a significant part of the impetus came from the festival and pent-up demand.'' Although the headwinds emanating from the pandemic-related challenges are unlikely to go away till mass vaccination becomes a reality, the economic agents and economic activities not only have learned to live with it but are also adjusting swiftly to the new reality, it said.

Given this, Ind-Ra now expects the third quarter to see contraction at 0.8 percent and the fourth quarter to print in 0.3 percent growth as against the earlier expectation of positive numbers only in July-September 2021-22. Accordingly, it expects 7.8 percent contraction in 2020-21 as against (-) 11.8 percent earlier, and GDP to grow by 9.6 percent in 2021-22, mainly due to the weak base of 2020-21, India Ratings chief economist Devendra Pant said in a report.

The better-than-expected Q2 numbers came in from manufacturing/electricity and other utilities with positive growth numbers, while mining and construction saw a significant reduction in contraction. But the same is not true for the contact-intensive services sectors like trade, hotel, realty, and tourism and they are likely to remain subdued for some more time due to social distancing norms and risk aversion, the agency said.

Agriculture has been a bright spot even though the lockdown and continues to be so, riding on the back of good monsoons. The agency expects 3.5 percent growth for agriculture and contraction of 10.3 percent and 9.8 percent for industry and services, respectively, in 2020-21. According to the agency, while government expenditure is expected to clip in at just 3.3 percent due to significant expenditure cuts, exports could fall 7.9 percent due to a combination of the ongoing trade conflicts and the pandemic increasing the uncertainty in the global economy.

Government expenditure declined 22.2 percent and gross value-added of public administration and defense declined 12.2 percent in the second quarter. It expects the retail and wholesale inflation to average 6.8 percent and (-)0.3 percent respectively in 2020-21 providing very little headroom to the Reserve Bank to make any changes in the policy rates.

Inflation has been hovering at 5-5.8 percent since May indicating cost-push pressures. FY21 fiscal deficit, budgeted at 3.5 percent, was at 119.7 percent of the budget estimate in October primarily because of the sharp decline in receipts, which by October were 31.5 percent of the estimate, whereas the expenditure was 54.6 percent.

The agency expects the fiscal deficit of the Centre to print in at 7 percent of GDP in FY21 while the current account to be in surplus at 1.1 percent of GDP and even the capital account is expected to record a surplus of USD67.3 billion.