India's FY21 GDP Growth Now Expected to Contract by 7.8%, Says India Ratings

New Delhi, December 24: India Ratings and Research on Thursday narrowed the contraction in India's FY21 gross domestic product (GDP) growth to negative 7.8 per cent from a negative 11.8 per cent. It pointed out the easing of the Covid-19 headwinds and better-than-expected 2QFY21 GDP numbers as the reasons behind such a move. "However, the question remains, how sustainable is the recovery witnessed in 2QFY21, as a significant part of the impetus came from the festival and pent-up demand," the rating agency said in a report. India’s GDP Likely to Contract by 7.3% in 2020–21, Says National Council of Applied Economic Research.

"Although the headwinds emanating from Covid-19 related challenges are unlikely to go away till mass vaccination becomes a reality, perhaps the economic agents and economic activities not only have learnt to live with it but also are adjusting swiftly to the post Covid-19 world," the report said. According to Ind-Ra, GDP growth during 3QFY21 is expected to come in at negative 0.8 per cent and 4QFY21 GDP growth to turn positive at 0.3 per cent as against its earlier expectation of it turning positive in 4QFY22. India's GDP Shrinks by 23.9% in Q1 of FY 2020-21, Worst in Past 40 Years.

Besides, the agency expects FY22 growth to be 9.6 per cent, mainly due to the favourable or weak base of FY21. "The non-contact intensive sector such as manufacturing or electricity and other utilities in 2QFY21 recorded positive growth, and the mining and construction sectors saw significant reduction in negative growth," the report said. "However, the same is not true for the contact-intensive services sectors such as trade, hotel, real estate, and tourism and they are likely to remain subdued for some more time due to social distancing norms and risk aversion."

Furthermore, the report pointed out that agriculture has been a bright spot even through the Covid-19 related lockdown and continues to be so, riding on the back of the favourable 2020 monsoon. "Ind-Ra therefore expects agriculture, industry and services to grow at 3.5 per cent, negative 10.3 per cent and negative 9.8 per cent YoY, respectively, in FY21." In terms of private consumption, the report said mainstay of aggregate demand, came under significant pressure in FY20 which got aggravated in FY21 due to Covid-19 headwinds.

"Although rural demand, on the back of four consecutive good harvests, is lending support to the consumption demand, it is inadequate to compensate for the loss of urban demand." "Urban demand, despite gaining some momentum lately, may remain subdued due to the depressed consumer sentiment and lower economic activity or employment generation."

On the other hand, monetary and fiscal measures, although have eased the liquidity requirements and are supportive of consumption, may still not be sufficient to spur investments as capacity utilisation has not yet fully recovered even to the pre-Covid level, the report said. "Ind-Ra expects private final consumption expenditure and gross fixed capital formation to fall 13.4 per cent and 16.8 per cent YoY, respectively, in FY21."

"Of the other two demand-side growth drivers, while government expenditure is expected to grow at just 3.3 per cent YoY due to significant expenditure compression, exports could fall 7.9 per cent YoY in FY21 due to a combination of the ongoing trade conflict and Covid-19 pandemic, increasing the uncertainty in the global economy."

(The above story first appeared on LatestLY on Dec 24, 2020 10:53 PM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).