Steeper contraction in FY21 GDP: ICRA revises forecast downwards

New Delhi: Ratings agency ICRA on Monday revised downwards its forecast for the contraction in the gross domestic product (GDP) for 2020-21 to 11% from 9.5% earlier with fresh Covid-19 infections remaining elevated at the end of the second quarter of the year.

However, it retained its earlier forecast of a 12.4% contraction in GDP in the second quarter. An ET poll of ten economists pegged the real GDP to shrink India’s 8-15.6% in the September quarter. India’s economy shrank 23.9% in the first quarter.

“With the pandemic continuing in India for over six months, we sense that economic agents are now adapting to the crisis, resulting in a graduated recovery to a new post-Covid normal,” said Aditi Nayar, principal economist at ICRA.

Nayar said there are some early green shoots, such as the sharp revival in passenger vehicles and motorcycles, but those seem to be driven by pent up demand as well as inventory restocking, casting some doubts on their sustainability.

The agency revised its projections for GDP to decline 5.4% from 2.3% earlier for the third quarter and 2.5% in the fourth quarter.

“Nevertheless, with rampant Covid-19 infections, we expect behaviours to remain altered for longer than what we had earlier presumed,” Nayar said, adding that this would continue to depress activity in some sectors, especially where social distancing is difficult such as travel, tourism and recreation.

“Additionally, the continued economic uncertainty and health concerns would result in a prolonged impact on consumption and investment decisions,” she said.

ICRA expect construction as well as trade, transport, hotels, communications and services related to broadcasting to recover with the longest lag and continue to underperform the rest of the economy.

Nayar said the gross value added (GVA) at basic prices for these sectors would record a contraction even in Q4 despite the favourable base effect, resulting in the overall GVA and GDP continuing to record a decline in growth in that quarter.

Icra cautioned that if the pace of GDP decline in the first quarter got revised below the initial estimate after data for the MSME and less formal sectors became available, the overall economic contraction for FY21 could be even worse than the ratings agency’s expectations.

Further, the revenue shock being experienced by the Central and the state governments would limit the extent of fiscal support that may be forthcoming and result in protracted fears about deferral of both the capex and the release of timely payments, Nayar said. Moreover, fresh restrictions being imposed in major trading partners following a new wave of Covid-19 cases, could cap the extent of further improvement in exports in the near term.