India Ratings and Research (Ind-Ra) expects gross domestic product (GDP) to contract 5.3% yoy in FY21. This will be the lowest GDP growth in the Indian history (Indian GDP data is available from FY51) and sixth instance of economic contraction, others being in FY58, FY66, FY67, FY73 and FY80; the previous low was negative 5.2% in FY80. The disorder caused by the COVID-19 pandemic unfolded with such a speed and scale that the disruption in production, breakdown of supply chains/trade channels and total wash out 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. As a result, besides contracting for the whole year, GDP will contract in each quarter in FY21. However, the agency believes the GDP growth would bounce back in the range of 5%-6% in FY22, aided by the base effect and return of gradual normalcy in the domestic as well as global economy.

The government of India announced an economic package of INR20.97 trillion (10% of GDP) on 12 May 2020 to mitigate the adverse impact of COVID-19 and related lockdown. However, Ind-Ra’s calculations, excluding the monetary measures and existing proposals in the union budget, show that the direct fiscal impact is only INR2,145 billion (1.1% of GDP). The credit and liquidity enhancing measures announced in the economic package in combination with some of the earlier steps announced by the Reserve Bank of India (RBI) will certainly address the supply-side issues of the economy. The Indian economy even before the COVID-19 related lockdown was suffering on the demand side, as all the demand drivers, except government final consumption expenditure (GFCE), namely private final consumption expenditure (PFCE), gross fixed capital formation (GFCF) and net exports were floundering. The lockdown and its impact on economy and livelihoods only aggravated the sagging consumption demand. Ind-Ra believes the government is aware of it; but, the near absence of demand-side measures in the economic package indicates the hard budget constraint facing the government. 

Ind-Ra therefore expects PFCE to contract 5.1% yoy in FY21 (FY20: 5.3% yoy) to reach a level lower than FY19’s. Even GFCF will contract 17.6% yoy in FY21 and the investment revival will now be pushed beyond FY22 due to a combination of the following factors: a) excess capacity, b) weak domestic/global demand, c) stretched/leveraged balance sheet of Indian corporates and, d) budget constraints leading to reduced government capex. 

The external environment continues to be challenging due to COVID 19 related restrictions coupled with trade friction and protectionist policy pursued by many developed economies. Ind-Ra expects merchandise exports to decline 9.4% yoy in FY21 (FY20: negative 4.9%), as all major export commodities would clock negative growth. Merchandise imports are expected to decline 17.4% yoy in FY21 (FY20: negative 8.9%). The import of coal; coke & briquettes; crude oil & gold and transport goods may decline significantly in FY21. As a result, the trade deficit is estimated to decline to a four-year low of USD97.7 billion (3.9% of GDP) and current account deficit to USD3.3 billion (0.1% of GDP) in FY21. However, 1QFY21 may see a current account surplus. 

From the supply side, agriculture is the only bright spot. Agricultural gross value added (GVA) is expected to grow 3.5% yoy in FY21. The India Meteorological Department in its second stage forecast for Southwest monsoon rainfall has predicted the monsoon rainfall to be 102% of long period average (1961-2010) in 2020.
The industry and services GVA is expected to contract 15.8% and 2.2%, respectively, in FY21. 

Ind-Ra expects the retail and wholesale inflation to come in at 3.6% and 1.2%, respectively, in FY21. Inflation in FY21 will be largely governed by i) monsoon rainfall, ii) global commodity prices especially crude oil and iii) monetary/ fiscal policy pursued by the RBI/ government to mitigate COVID-19. The RBI in addition to pursuing a fairly accommodative monetary policy has been quite swift and proactive both before and after the COVID-19 lockdown to ensure smooth functioning of the financial market. Yet, risk aversion in the financial market has remained elevated and the rate spread between the policy rate and instruments of various tenors, instead of coming down, has widened. The spread between 10-year G-sec and policy rate averaged 186bp in June 2020 (up to 15 June).
Ind-Ra therefore expects the FYE21 interest rate on 10-year G-sec to be in the range of 6.2%-6.3%. 

Fiscal deficit of the central government in FY21 is expected to more than double (7.6% of GDP) the budgeted amount (3.5% of GDP). The majority of the fiscal slippage will be from the revenue side.



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Analyst Names

  • Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurgaon Haryana 122002
    +91 124 6687255

    Dr Devendra Pant

    Chief Economist and Head Public Finance
    0124 6687251

    Amit Jain

    Analyst
    0124 6687264

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    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121