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Business News/ News / India/  Covid-19 impact: India set for deepest recession yet in FY21, warn economists

Covid-19 impact: India set for deepest recession yet in FY21, warn economists

Economists paint a grim picture of the Indian economy for FY21 ahead of the statistics department’s release of the March quarter GDP print today
  • Rating agencies, investment banks and multilateral agencies have sharply downgraded their full-year growth forecasts for the Indian economy in the wake of the shutdown
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    Representative image

    New Delhi: Professional forecasters veered towards a consensus that India’s economy will face its worst recession in 40 years, contracting by at least 5% this fiscal, a day before the statistics department releases the March quarter GDP print, which will partially reflect the unfolding impact of the pandemic on the economy.

    On Thursday, S&P Global Ratings said the Indian economy will contract 5% in FY21, assuming that the ongoing outbreak in India will peak in the September quarter while Swiss bank UBS said India’s economy could shrink 5.8% during the current financial year amid weaker-than-expected domestic economic activity and the ongoing global recession. Earlier, S&P’s Indian arm Crisil, Fitch Ratings and Goldman Sachs projected India’s economy to contract 5% in FY21.

    Although the government has eased restrictions and allowed businesses to restart operations, India’s more than two-month-long lockdown and flight of migrant workers from urban and industrial centres have crippled economic activity. Goldman Sachs has pointed out that India’s stringent lockdown and tepid fiscal support, small compared with even other emerging economies, may lead to GDP contracting by a massive 45% in the June quarter.

    S&P said a big hit to growth will mean a large, permanent economic loss and deterioration in balance sheets throughout the economy. “The risks around the path of recovery will depend on three key factors. First, the speed with which the covid-19 outbreak comes under control. Faster flattening of the curve—in other words, reducing the number of new cases—will potentially allow faster normalization of activity. Second, a labour market recovery will be key to getting the economy running again. Finally, the ability of all sectors of the economy to restore their balance sheets following the adverse shock will be important. The longer the duration of the shock, the longer recovery," it cautioned.

    (Graphic: Sarvesh Kumar Sharma/Mint)
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    (Graphic: Sarvesh Kumar Sharma/Mint)

    Growth projections by economists for the March quarter vary between 0.5% and 3.6%. That compares with the 4.7% growth registered in the preceding December quarter. The March quarter growth number will be keenly watched as it includes one week of lockdown, which has the potential to skew the growth numbers.

    “Several companies tend to have some kind of bunching of activity towards the end of the financial year to meet their targets. This lends an upward thrust to growth numbers. In the Indian case, while the shutdown was in the last week of March, several restrictions had come in earlier, especially for services that would have pushed back growth numbers further," said Madan Sabnavis, chief economist at Care Ratings.

    HDFC Bank on Thursday said stay-at-home guidelines and the nationwide lockdown are likely to severely hit consumer demand, especially for non-essential items, which account for 47% of total consumption expenditure.

    “While demand is likely to recover somewhat once the lockdown is lifted, it is unlikely to pick up to pre-covid levels as social distancing policies and uncertainty over future employment and income prospects can lead to a breed of cautious consumers," said HDFC Bank in a report released in Thursday.

    “Without adequate fiscal support during a recession year, the damage to income that has already happened is going to start working through the multiplier, which means the damage will get worse," former chief statistician of India Pronab Sen said.

    “While there is no doubt that India is facing a significant economic shock, the pace of recovery, if any, will be determined by the economic policy choices taken to ensure that the significant secondary impacts (job losses, reduced income levels, corporate defaults, rising NPLs (non-performing loans), rating downgrade, etc.,) can be contained," UBS said in a report.

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    Published: 29 May 2020, 01:13 AM IST
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