ICRA revises India's GDP contraction to 11% from 9.5% for FY21 as COVID-19 runs wild

Ratings agency ICRA has revised its forecast for contraction in India's gross domestic product (GDP) for financial year 2020-21 downwards to 11 per cent. The revision comes on the back of "unabated rise in COVID-19 infections in India". The ratings agency had earlier projected GDP contraction of 9.5 per cent for the current financial year.

ICRA has retained its forecast of 12.4 per cent contraction in GDP for the second quarter of current fiscal. The agency, however, expects Indian economy to shrink in both third and fourth quarters of FY21. It had earlier predicted that the economy will show growth in the last quarter of this fiscal.

"After the expected plunge in Indian GDP (at constant 2011-12 prices) in Q1 FY2021, the recovery in Q2 FY2021 has broadly evolved along anticipated lines. In our view, the year-on-year (YoY) contraction in GDP will narrow considerably from 23.9 per cent in Q1 FY2021 to 12.4 per cent in Q2 FY2021, in line with our previous expectation. While we expect the situation to improve in H2 FY2021 relative to H1 FY2021, we are revising our forecasts for Q3 FY2021 and Q4 FY2021 given the unabated rise in COVID-19 infections in India," ICRA said.

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"We now expect a deeper contraction of 5.4 per cent in Q3 FY2021 (earlier expectation: -2.3 per cent) and a continued de-growth of 2.5 per cent in Q4 FY2021 (earlier expectation: +1.3 per cent), implying a full year contraction of 11.0 per cent," it further added.

Listing sector-wise expectations, ICRA said that construction, trade, transport, hotels, communications, and services related to broadcasting are likely to recover at the slowest pace and "continue to underperform the rest of the economy". The gross value added (GVA) at basic prices for these sectors is likely to see a contraction even in the last quarter of FY21, despite the favourable base effect, resulting in the overall GVA and GDP continuing to record a YoY de-growth in that quarter, the agency added.

"We also caution that if the pace of contraction in Q1 FY2021 gets revised below the initial estimate, after data for the MSME and less formal sectors becomes available, the overall GDP outcome for FY2021 could be even worse than our current expectation of an 11.0 per cent YoY decline. Nevertheless, higher-than-anticipated government spending, a faster global recovery, and an early decline in fresh COVID-19 cases could impart an upside to these forecasts," it said.

The ratings agency expected Indian economy to witness an uneven recovery in September quarter of the ongoing fiscal. Doubts remain on sustainability of green shoots seen in certain indicators, it cautioned.

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"An uneven recovery is underway in Q2 FY2021, as evidenced by the varied performance of the high frequency indicators in July-August 2020. There are some early green shoots, such as the sharp revival in passenger vehicles and motorcycles, but those seem to be driven by pent up demand as well as inventory restocking, casting some doubts on their sustainability," ICRA said.

The outlook for agriculture appears optimistic, which should continue to bolster farm demand, it said in its macroeconomic update for September. Several other sectors have witnessed activity stabilising at levels that are moderately below their pre-COVID performance, it said, adding this trend may entrench over the next two quarters, before a further substantial uptrend materialises.

"However, there have been some slippages in the recent data, such as the worsening pace of contraction of electricity generation, crude oil and refinery output, diesel consumption and non-oil merchandise exports, reinforcing the view that the return to normalcy will not be smooth," ICRA warned.

Referring to the six-month loan moratorium that ended on August 31, 2020, ICRA said the extent of increased financial stress on entities in various sectors amid the graduated recovery, as well as the potential rise in delinquencies and NPAs will have to be closely watched.

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