SBI lowers GDP estimates for FY20 to 4.6% from 5%

The research desk of State Bank of India has lowered its GDP growth forecast for FY20 to 4.6 per cent from the earlier 5 per cent. The latest SBI Ecowrap report even predicted growth rate to remain below 6 per cent for the two years in a row.

"The FY20 GDP estimate as released by the CSO pegs the GDP growth rate at 5 per cent (we had revised our GDP projection to 5 per cent in November 19), a 11-year-low. Nominal GDP growth at 7.5 per cent is a 42-year-low. For FY20, the budgeted nominal GDP growth rate was 12 per cent which has now been revised downwards to 7.5 per cent. Based on this GDP revision, the impact on fiscal deficit is around 12 basis points for FY20," SBI Ecowrap said.

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The SBI Ecowrap report clarified this estimate has a shelf-life of two months and is only used as an input for budget calculations. The Central Statistics Office (CSO) will release the first revised estimate of FY17, FY18 and FY19 on January 31, the report said, and based on that, GDP and GVA for FY20 would be revised further downwards in second advance estimate for FY20 on February 28 and on May 29.

"We are now revising our GDP projection for FY20 to 4.6 per cent based on current available trends. It is likely that the 40 bps downward revision could be spilt over February and May in equal proportion," the report said. "We now believe that the RBI projection of a 5.9-6.3 per cent GDP for FY21 could be on the higher side. We could be now staring at a sub 6 per cent growth for 2 successive years!"

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The SBI Research Desk stated that factors like government expenditure are the key factors in determining the overall growth outlook for FY20 as variations in government spending have a spill over effect on other sectors. In Q2, government spending alone accounted for 40 per cent of the entire quarter's growth (1.9 per cent out of 4.5 per cent headline GDP growth), even as its share in GDP was lower than 13 per cent, it said.

"However, this momentum is unlikely to persist given that the government has already announced its intention of cutting expenditure. The key to a quick recovery is consumption. The CSO estimates reveal an impending consumption recovery but we believe the quadruple balance sheet problem (Banks, Corporates, NBFCs and Households) is creating space for deleveraging that will delay a consumption pick up and also an investment pick up," the report clarified

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"Specifically, the IBC resolution has been prolonged and we understand as companies are admitted into liquidation, the employees on the rolls of the company are only cumulatively compensated till the resolution process is completed, while the contractual employees are downsized. This also results in reduced remittance flows as contractual employees could head back to place of origin. This could also act as a constraining factor on consumption growth and thus it is essential that we also find a quick resolution (average resolution time is of 324 days as on March 2019)," it said.

(With agency inputs)