Will GDP India Contract to 11.8% in FY21?

To Rebound to 9.9% in FY22 

The quantum of negative gross domestic product (GDP) growth of 23.9% recorded in 1Q FY21 is much higher than India Ratings and Research’s (Ind-Ra) forecast of 17.0%, because of the impact of the COVID-19 pandemic and resultant lockdown. The agency has, therefore, revised its FY21 GDP growth forecast further downward to negative 11.8% from negative 5.3%. 

The negative 23.9% growth in 1QFY21 is the first contraction in quarterly GDP data series which have been made available in the public domain since 1Q FY98. The economic loss in FY21 is estimated to be INR18.44 trillion. However, GDP is expected to rebound and grow at 9.9% YoY in FY22 mainly due to the weak base of FY21. 

All indicators, be it mobility or consumption, are pointing towards a much weaker economic recovery. Out of 35 states/union territories (UTs), workplace mobility improved only in 16 states/UTs 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/UTs reduced by end-August from end-June. 

As human mobility is closely linked with economic activity, even GSDP weighted workplace mobility depicts a similar trend as the workplace mobility. After a pickup in June to 70.0% of baseline, it declined to 68.5% in July. 

However, the August (70.3%) data again shows a pickup. Ind-Ra believes the work place mobility would remain low even in the next few months and would not return to normal till a vaccine is found. 

While a second wave of infections is being witnessed globally, India still has not been able to flatten the first wave of infection curve. On 6 September 2020, India added 91,723, the maximum single day infections, in the world. 

Ind-Ra’s FY21 GDP growth forecast of negative 11.8% will be the lowest GDP growth in the Indian history (GDP data is available from FY51) and sixth instance of economic contraction, others being in FY58, FY66, FY67, FY73 and FY80. The previous lowest was negative 5.2% in FY80.

Given the size of contraction in 1QFY21 and reign of COVID-19 pandemic, the recovery curves estimated by Ind-Ra in June 2020 are unlikely to hold and have moved southwards. Earlier, Ind-Ra had expected GDP in 4Q FY21 to almost reach the level attained in 4Q FY20. However, the estimates show that now the GDP in real terms (constant prices) will surpass the 4Q FY20 level only in 4Q FY22 and in nominal terms (current prices) in 3Q FY22.    

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 negative 12.8%, down from the earlier estimate of negative 5.1%. 

Ind-Ra expects essentials to recover first and reach the 1Q FY20 level. This is expected to happen in 2Q FY21, followed by non-discretionary consumer goods and infrastructure sector in 3Q FY21 and industrial goods and cyclical sectors in 4Q FY21. 

Discretionary consumer goods sectors such as airlines, hotels, airport, real estate and construction are unlikely to witness enough traction in FY21 and will start recovering only in 1Q FY22. 

The gross fixed capital formation is now estimated to grow at negative 27.3% in FY21 compared to our earlier estimate of negative 17.6%. Ind-Ra believes factors such as a) excess capacity, b) weak domestic/global demand, c) stretched/leveraged balance sheet of Indian corporates and, d) budget constraints will now push the investment demand revival beyond FY22. 

The only bright spot from supply side is agriculture, as both industry and services activities have been severally impacted. Ind-Ra expects agriculture to grow at 3.5% YoY in FY21. After several years, this sector has witnessed three consecutive good harvests – Rabi 2019, Kharif 2019 and Rabi 2020 and in all likelihood would witness the fourth one as well – Kharif 2020. As per the latest data available, the actual rainfall during 1 June – 2 September 2020 for the country as a whole has been 9.0% above normal and the total area sown under Kharif crops as on 4 September 2020 has been 109.5 million hectare, up 6.3% YoY. 

While the expenditure of central government (revenue and capital) grew 11.3% in April-July FY21, receipts (revenue and capital) declined 41.7%. This translated into fiscal deficit reaching INR8,213 billion (103.1% of FY21 budget estimate) during April-July FY21. Ind-Ra now forecasts the central government fiscal deficit to increase to INR15.17 trillion in FY21 (FY21 (BE): INR7.96 trillion, FY20 (provisional): INR9.36 trillion). 

Ind-Ra expects the retail and wholesale inflation to come in at 5.1% and negative 1.7%, respectively, in FY21. Inflation in FY21 will be largely governed by i) monsoon rainfall, which was 9.0% above normal as on 2 September 2020, ii) global commodity prices especially crude oil and iii) monetary/fiscal policy pursued by the RBI/GoI to mitigate COVID-19 impact.  

Retail inflation has remained in excess of 6.0% now for two consecutive quarters (4Q FY20: 6.67%; 1QFY21: 6.57%). If retail inflation breaches the 6% mark for the third consecutive quarter, it will constitute failure to achieve the inflation target, and the Monetary Policy Committee of the RBI will have to present a strategy to the GoI. This clearly has made the job of the committee difficult and reduced the probability of a further rate cut. 

In the wake of both weak global and domestic demand conditions, Ind-Ra expects India’s current account to record a surplus of USD8.4 billion (0.3% of GDP) in FY21 (FY20: deficit of USD24.7 billion, negative 0.9% of GDP). Merchandise exports is expected to decline 12.5% in FY21 (FY20: negative 4.9%), as all major export commodities would clock negative growth.  

Similarly, merchandise imports are expected to decline 22.6% YoY in FY21 (FY20: negative 8.9%). Although capital inflows are estimated to decline to USD67.3 billion in FY21 from USD 83.2 billion in FY20, due to the current account recording a surplus, it is expected to push the forex reserve up by USD75.7 billion in FY21.