India Ratings downgrades FY21 GDP growth forecast to 3.6%

The spread of COVID-19 and the resultant nationwide lockdown that has crippled most economic and commercial activities, has led India Ratings and Research revise its FY21 gross domestic product (GDP) growth down to 3.6 percent from 5.5 percent.

“The revision is based on the assumption of lockdown continuing till end-April 2020 (full or partial) and gradual restoration of economic activities May 2020 onwards,” India Ratings said in a note.

In view of the lockdown, the rating agency has also revised the FY20 GDP forecast downward to 4.7 percent from the National Statistical Office’s advance estimate of 5.0 percent. It expects the GDP growth to come in at 3.6 percent in Q4FY20 and 2.3 percent in Q1FY21.

Average growth is forecast to decelerate to 2.8 percent in H1FY21 and recover to 4.3 percent in H2FY21 due to the base effect and a gradual recovery and restoration of supply chain.

“Some of the initial and visible impact of the spread of COVID-19 on the India economy has been the disruption in the production of select manufacturing sectors due to the breakdown of supply chain, near collapse of the tourism, hospitality and aviation sectors and a rise in the work load of the healthcare sector. Also micro, small and medium enterprises, irrespective of the sector they operate in, have begun to witness cash flow disruptions,” the agency said.

It also noted that a changed outlook of investors has led to a huge outflow of capital and the rupee has come under intense pressure. Also, significant wealth erosion would impact consumption levels.

With the rabi crop maturing, disruption in harvesting and inability of agricultural markets to timely procure them could be a blow to the farmers’ income and rural demand, it added.

Further, a stop on the construction activities will accelerate the problems of the real estate sector and the demand for consumer durables, entertainment, sports, wholesale trade, transport, tourism, hospitality etc. will decline, it said.

Noting the opportunities, India Ratings said that several manufacturing activities will de-risk their operations by locating themselves outside China. Also, the disruption in supply chain, especially in sectors such as automobiles, pharmaceuticals, electronics and chemical products, could be an incentive for Indian manufacturing sector to become part of the supply chain.

The agency believes that this would require significant government and policy support, and will play out only in the medium- to long-term.

Moreover, the extent of benefit of lower global commodity prices especially crude oil to the Indian economy would depend on the pace of restoration of normalcy and the ability and nimbleness of the Indian businesses to take advantage of this opportunity.

The ratings agency feels that the government has so far announced measures which are focussed on easing business related processes or compliance and a package for the vulnerable sections of the society. Similarly, the regulator has announced measures to avert any immediate disruption in the financial system through a liquidity infusion and has also eased the regulatory and supervision related norms to mitigate the financial stress building up in the system.

India Ratings and Research expects the government to announce more measures in the coming days and weeks to mitigate the pains and concerns of the other segments or sectors of the society and economy, since the role of the government is crucial in terms of containing the spread of COVID-19 and simultaneously mitigating the adverse impact of the lockdown on the economy.

Leave a Reply

Your email address will not be published. Required fields are marked *