Goldman Sachs on Wednesday put out the bleakest FY21 growth forecast for India at 1.6%, down from 3.3% previously, holding that the spread of the Covid-19, announcements of a nationwide shutdown, social distancing measures and fears among consumers and businesses may lead to a significant contraction in economic activity.
So far Fitch Ratings and ICRA Ltd had pegged India’s FY21 growth at 2% while S&P and Moody’s have projected India to grow at 3.5% and 2.5% respectively.
India’s growth is estimated to have declined below 5% in FY20 from 6.1% in FY19, as domestic investment and consumption demand were under stress because of the liquidity crunch that non-banking financial companies faced and the sharp slowdown in credit growth. Recent leading indicators such as manufacturing Purchasing Managers’ Index (PMI), goods and services tax collections and auto sales for the month of March suggest substantial impact of the covid-19 outbreak on the Indian economy.
Goldman Sachs said with escalation of Covid-19 outbreak, it is expecting a global recession with the world and US GDP set to contract by 1.8% and 6.2% respectively in 2020.
The investment bank said despite the policy support so far, and our expectations of more, it believes that the nationwide shutdown, and rising public anxiety about the virus are likely to lead to a sharp deterioration in economic activity in March, and in the next quarter. “We continue to expect a strong sequential recovery in the second half of the fiscal year, based on three assumptions. First, the 3-week nationwide lockdown, which is expected to be removed only in a staggered fashion, and social distancing measures reduce new infections over the next 4-6 weeks. Second, while the fiscal easing so far has been limited, our expectation is for further fiscal stimulus by the center and the states. Third, we expect the RBI to continue with its monetary easing policy, along with liquidity infusion measures. While more forceful policy support could present some upside risk, the recovery could further be delayed if the pandemic is not brought under control globally and domestically over the next few months," it added.
Goldman Sachs said over the past two weeks, the number of COVID-19 cases in India has risen rapidly. “These numbers are likely to be under-reported as the number of tests performed so far is minuscule compared to India's population (less than 50,000 tests as of 1 April 2020, compared to a population size of 1.38 billion people)," it added.
With monetary policy turning sharply towards a stimulus, Goldman Sachs now expects the RBI to reduce rates by another 50 bps between now and the end of Q3, with risk on the side of further easing. “Our new fiscal impulse calculations estimate a broadly neutral fiscal impulse of -8bp including the central government stimulus package—more supportive to growth in FY21 compared with the budget projection scenario, but not a large positive impulse. We expect more fiscal stimulus going forward, with active participation from states as well," it added.
Finance minister Nirmala Sitharaman last week rolled out a ₹1.7 trillion relief package, in an attempt to limit the economic damage caused by the coronavirus outbreak and tackle loss of livelihood of millions of poor hit by the unprecedented lockdown. The relief package aims to alleviate the financial pain faced by migrant workers, farmers, urban and rural poor, and women. The government is also working on a fiscal stimulus to jump-start the economy apart from providing support to the healthcare and industrial sectors, economic affairs secretary Atanu Chakraborty hinted on Tuesday. The Reserve Bank of India (RBI) has also taken a series of steps to boost liquidity in the banking system and encourage banks to lend.