I-bank says projected fall in FY21 GDP will be deeper than India’s biggest recessions
Earlier, Goldman Sachs had estimated India’s growth to shrink 20% in the June quarter
Goldman Sachs on Sunday said India’s economy may contract by a huge 45% in the June quarter and the projected 5% fall in gross domestic product (GDP) for 2020-21 will be deeper compared to all “recessions" India has ever experienced.
Earlier, the investment bank had estimated India’s growth to shrink 20% in the three months to June and 0.4% in FY21. It has also revised its global growth forecast from -2.5% to -3.6% for 2020, with risks remaining on the downside.
“In India, the virus continues to spread, the nationwide lockdown continues till 17 May and the Prime Minister already announced it will be extended, with gradual relaxation of restrictions, while concerns among consumers and businesses continue. The deeper trough in our Q2 forecasts reflects the extremely poor economic data we have received so far for March and April, and the continued lockdown measures, which are among the most stringent across the world," it added.
The report was released before the extension of the lockdown to 31 May was announced on Sunday.
Goldman Sachs expects a strong sequential rebound of 20% in the September quarter. However, beyond that, it expects only a gradual recovery of 14% and 6.5% in the December and March quarters, respectively, as “the targeted policy support continues to be tepid compared to other emerging economies, and far less than most advanced economies".
After discussions with companies, Goldman Sachs’ equity analysts said restarting economic activity during the extended lockdown continues to pose challenges, especially in red zones, which comprise approximately 45% of GDP. “Supply chains are improving, but are still operating at low levels, along with missing logistics, and weak end-demand."
The investment bank said though it has factored in the lockdown extending beyond 17 May, and continued social distancing measures to reduce new infections in the next four-six weeks, it does not believe the latter half of the fiscal will see a more rapid sequential growth than thought previously.
“While macroeconomic policies have clearly eased, and we expect them to ease further, we believe that policy support, in particular discretionary fiscal policy support, which can minimize second-round effects of the pandemic, and make any economy quickly rebound in times of an unprecedented shock, has been tepid so far," it said.
According to calculations, in aggregate, the discretionary component of fiscal support across the six phases of announcements by the finance ministry, including a ₹1.7 trillion package in March, and the announcements between 13 and 17 May, stands at 1.3% of GDP, or ₹2.7 trillion, much smaller than the aggregate figure of 10% of GDP economic package announced by the PM.
While it may seem India cannot perhaps have a fiscal response of 10-15% of GDP like in many advanced economies due to lack of fiscal space, it supports the idea of a strong demand stimulus, the report said. “Amid a globally and domestically unprecedented shock, our view has been that a larger, carefully calibrated, and properly executed discretionary fiscal response is clearly warranted."
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