S&P expects GDP to contract 9% in FY21 on rising covid-19 cases

• Last week, Fitch Ratings and Moody’s Investors Service cut their GDP estimates for FY21 to contraction of 14.8% and 11.5% respectively while Investment bank Goldman Sachs sees GDP to shrink by 10.5%

NEW DELHI: S&P Global Ratings on Monday projected a contraction of 9% in India’s gross domestic product (GDP) in FY21 against its earlier estimate of 5% contraction, holding that rising coronavirus cases in the country will keep private spending and investment lower for a longer-than-anticipated period.

S&P Global Ratings joined other economic forecasters in projecting a steeper decline in India’s GDP. Last week, Fitch Ratings and Moody’s Investors Service cut their GDP estimates for FY21 to contraction of 14.8% and 11.5% respectively, while investment bank Goldman Sachs sees GDP to shrink by 10.5% during the financial year.

"One factor holding back private economic activity is the continued escalation of the covid-19," said Vishrut Rana, Asia-Pacific Economist for S&P Global Ratings.

India's economy shrank 23.9% year-on-year in the June quarter, the steepest decline among G-20 countries. The pandemic, and tight lockdown measures enforced to combat it, knocked private consumption by 26.7% while fixed investment sunk 47.1%. Higher welfare spending prevented an even sharper fall in growth. Agriculture cushioned the blow as it was the only major sector to expand, thanks to a favorable monsoon season.

While India eased lockdowns in June, S&P said it believes the pandemic will continue to restrain economic activity. “New cases per day in India averaged nearly 90,000 in the week ending Sept.11, according to data from the World Health Organization. This is up from an average of about 70,000 per day in August. As long as the virus spread remains uncontained, consumers will be cautious in going out and spending and firms will be under strain," it added.

The rating agency said activity did begin to recover during the post-lockdown phase, albeit more gradually than it anticipated earlier. “One indicator that can provide a reference for normalization in the economy is mobility, which reflects the degree to which households are travelling out for various purposes such as shopping. According to data from Google, mobility for retail and recreation was around 40% below baseline in the first week of September compared with 60% down on average during the March-June period," it added.

S&P said though industrial activity is recovering faster than services, high frequency indicators suggest that output is still lower relative to the same period last year and hence growth for the September quarter will be negative.

The rating agency said India's high deficits limit the scope for fiscal stimulus. “While fiscal spending increased during the March–June quarter, the targeted fiscal stimulus measures announced so far amounts to about 1.2% of GDP. This magnitude is lower compared with global averages. The International Monetary Fund estimates that on average comparable stimulus measures across global emerging markets have been about 3.1% of GDP," it added.

S&P expects a weak base and some degree of normalization to result in growth of about 10% in the following fiscal year FY22 as consumers resume discretionary activity that they are curtailing during the pandemic. “We also do not expect policymakers to enforce further widespread lockdowns. The larger adverse shock to growth will be driven by corporate balance sheet damage, with small and midsize enterprises closing shop, and larger firms holding back capital expenditure, which will constrain their growth capacity," it added. The rating agency expects a larger permanent loss in output of 13% over the next three years.

While the option of fiscal stimulus remains constrained, "the potential for further support monetary support is curbed by India's inflation worries," Rana said.

The Reserve Bank of India has cut policy rates by 115 basis points so far this year, to 4%. However, rising food inflation has pushed inflation to 6.9% in July, higher than the upper band of the central bank's 2%-6% target range, forcing the RBI to put a pause in its rate cutting cycle.