India Ratings Says Country's GDP Likely To Contract Record 5.3% In 2020-21

Credit ratings agency India Ratings said on Wednesday that it expects the country's GDP or gross domestic product to contract a record 5.3 per cent in the current financial year, worse than an earlier low of 5.2 per cent recorded in 1979-80. If the projection comes true, it will be the "lowest GDP growth rate in the Indian history (Indian GDP data is available from FY51), and the sixth instance of economic contraction", following financial years 1957-58, 1965-66, 1966-67, 1972-73 and 1979-80, according to India Ratings. However, the agency expects the country's economy to return to growth in the range of 5-6 per cent in fiscal year 2021-22.

"The disorder caused by the COVID-19 pandemic unfolded with such speed and scale that the disruption in production, breakdown of supply chains/trade channels and total washout of activities in aviation (some activities have started now), tourism, hotels and hospitality sectors will not allow the economic activity to return to normalcy throughout FY21," India Ratings said.

India Ratings, which expects the country's GDP to contract in each quarter of financial year 2020-21, said the bounce-back in the next year will be "aided by base effect and the return of gradual normalcy in the domestic as well as global economy".

The direct fiscal impact of the government's economic package worth Rs 20.97 lakh crore is only Rs 2,14,500 crore, excluding the monetary measures and existing proposals in the Union Budget, India Ratings said.

It expects the government's fiscal deficit to more than double to 7.6 per cent of GDP, compared to the budgeted 3.5 per cent, with the majority of fiscal slippage from the revenue side.

The government had in May announced monetary and fiscal support worth Rs 20.97 lakh crore to mitigate the impact of the coronavirus pandemic, which pushed an already-slowing economy into a standstill, affecting businesses and thousands of jobs.

India Ratings, however, added that the credit and liquidity-enhancing measures in the economic package along with earlier steps taken by the RBI "will certainly address the supply-side issues of the economy".

Even before the COVID-19-induced lockdown, the economy was suffering on the demand side. "The lockdown and its impact on economy and livelihoods only aggravated the sagging consumption demand," said India Ratings.

The near absence of demand-side measures in the economic package indicates the "hard budget constraint facing the government", it added.

India Ratings also said the country's merchandise exports are expected to drop 9.4 per cent in the current fiscal year, and exports to decline 17.4 per cent. The trade deficit - or the shortfall in exports compared to imports - is estimated to shrink to a four-year low of $97.7 billion (3.9 per cent of GDP), it noted.

The external environment continues to be challenging due to coronavirus-related restrictions coupled with trade friction and protectionist policy pursued by many developed economies, India Ratings said.