NEW DELHI : Rating agency Crisil Ltd on Tuesday said Indian economy may contract by 5% in FY21 while revising downward its growth estimate for the year from 1.8% estimated in April, holding that India’s partial lockdown continues to be a hindrance to normal economic activity while the underwhelming economic package is unlikely to boost the economy in the short run.
The government has extended the lockdown four times till 31 May to deal with the rising number of coronavirus cases, thus curtailing economic activity severely. The economic cost of the lockdown has begun to show on hard numbers with factory output contracting 16% in March and merchandise exports falling by an unprecedented 60% in April.
“We believe successive lockdowns have a non-linear and multiplicative effect on the economy – a two-month lockdown will be more than twice as debilitating as a one-month imposition, as buffers keep eroding. Partial relaxations continue to be a hindrance to supply chains, transportation and logistics. Hence, unless the entire supply chain is unlocked, the impact of improved economic activity will be subdued,” it added.
Crisil said during the first quarter the economy is likely to contract 25%. “The first quarter of this fiscal will be the worst affected. June is unlikely to see major relaxations as the Covid-19 affliction curve is yet to flatten in India. Not only will the first quarter be a washout for the non-agricultural economy, services such as education, and travel and tourism among others, could continue to see a big hit in the quarters to come. Jobs and incomes will see extended losses as these sectors are large employers,” Crisil said.
Goldman Sachs earlier this month said India’s economy may contract by a huge 45% in the June quarter and also projected 5% fall in GDP for FY21.
The rating agency has assumed a normal monsoon, soft crude prices and that the containment measures taken by the government are likely to be relaxed after May 31, even though the lockdown may continue. However, it cautioned that there are further downside risks to its growth projection in case of a second wave of covid-19 cases, a sub-optimal monsoon or a further markdown in global growth, if there is uneven health recovery and premature austerity in the face of a large rise in public debt in most countries.
“We believe a catch-up to the pre-crisis trend level of GDP growth will not be possible in the next three fiscals despite policy support. Under the base case, we estimate a 10% permanent loss to real GDP (from the decadal-trend level), assuming average growth of about 7% between fiscals 2022 and 2024,” it added.
The rating agency said India’s ₹20.9 trillion economic package lacks enough muscle to support growth. “The package has some short-term measures to cushion the economy, but sets its sights majorly on reforms, most of which will have payoffs only over the medium term. We estimate the fiscal cost of this package at 1.2% of GDP. Given that the fiscal boost is not substantial and direct, it is unlikely to result in a material positive delta to growth this fiscal,” it added.
