Jolted by Q1 slump, economists rush to further lower GDP forecast for fiscal 2020-21
Economy

Jolted by Q1 slump, economists rush to further lower GDP forecast for fiscal 2020-21

While SBI has predicted nearly 11% contraction for the whole year and negative growth in all four quarters, others have also revised already-bleak estimates.

   
Representational image of closed shops in Amritsar, Punjab, under the lockdown | Photo: PTI

Representational image of closed shops in Amritsar, Punjab, under the lockdown | Photo: PTI

New Delhi: A day after official data showed the Indian economy had contracted by a record 23.9 per cent in the April-June quarter, many economists have further lowered their growth projections for the full financial year 2020-21, with the worst forecasts predicting a 11 per cent contraction.

Most economists, such as those from banks and financial institutions, both Indian and foreign, also expect the Indian economy to contract in all four quarters of 2020-21, as against earlier expectations that growth may revive in the second half of the fiscal year.

These predictions have also led to demands of a further fiscal stimulus to revive demand.

The first quarter GDP numbers released Monday showed that sectors like construction, manufacturing, and hotels and transport had declined sharply by 50 per cent, 39 per cent, and 47 per cent respectively. The data further showed that private consumption and capital formation — an indicator of investment demand in the economy — had fallen sharply.

The Reserve Bank of India had warned that the impact of the pandemic on economic activity will be unprecedented. It had also warned of a severe shock to consumption on account of the fall in discretionary spending.


Also read: 4 questions Indian economy faces after the record Q1 GDP slump


SBI predicts double-digit full-year contraction

State Bank of India (SBI) group chief economic advisor Soumya Kanti Ghosh said in a report Tuesday that GDP contraction in the second quarter is also likely to be in double digits.

“Our preliminary estimate indicates that all the four quarters of FY21 will exhibit negative real GDP growth and decline of full year growth will likely be in double digits (around 10.9%),” Ghosh said, estimating the GDP contraction at 12 to 15 per cent in Q2, 5 to 10 per cent in Q3 and 2 to 5 per cent in Q4.

Back in May, SBI had forecasted that the economy would contract by 6.8 per cent in 2020-21. “It seems that momentum of economic pick-up has slowed down in Q2 FY21,” Ghosh said.

Standard Chartered Bank also revised its growth projection to -8 per cent from the earlier -4 per cent, citing the worse-than-expected Q1 GDP contraction, a longer-than-expected recovery cycle amid still-high Covid-19 infection levels, limited fiscal space, and an already weak economy before the coronavirus outbreak.

Economist Anubhuti Sahay and others said in the report that a revival of GDP growth to pre-Covid levels is likely to take longer as the nominal GDP growth shock in FY21 is likely to delay the private investment recovery cycle significantly.

A BofA Securities report authored by economists Aastha Gudwani and Indranil Sen Gupta also said growth contraction in Q1 was steeper than estimated, and revised the full year growth projection downwards to -7.5 per cent from -6 per cent.

“Sharper than expected fall in growth calls for supportive measures from both the RBI and the MoF (Ministry of Finance). While the RBI did announce multiple measures to soothe bond yields and foster orderly market conditions, we see them following this up with further rate cuts of 75bp (basis points) by March 2021. We also expect the MoF to announce demand side measures to support recovery,” they said.


Also read: Global trade seen recovering faster from pandemic than after 2008 financial crisis