India’s GDP growth rate projection lowers to 1.9% for FY21, lowest in 29 yrs, says study

28 April, 2020 | newsx bureau

Ind-Ra lowers India's FY21 GDP growth rate to 1.9%, lowest in 29 yrs Business

Coronavirus: Based on the assumption due to lockdown, India Ratings and Research (Ind-Ra) says that in Financial year 21 Gross Domestic Product (GDP) growth further down to 1.9 per cent.

Coronavirus: India Ratings and Research (Ind-Ra) on Monday revised its FY21 Gross Domestic Product (GDP) growth further down to 1.9 per cent, the lowest in the last 29 years (FY92: GDP grew 1.1 per cent) based on the assumption that the partial lockdown will continue till mid-May.

On March 30, it had forecast a growth of 3.6 per cent. Ind-Ra’s estimate suggests that GDP may come back to the 4Q FY20 level only by 3Q FY21, anticipating the resumption of normal economic activities during 2Q FY21 and festive demand during 3Q FY21.

However, if the lockdown continues beyond mid-May and a gradual recovery takes root only from end-June 2020, GDP growth may slip further to negative 2.1 percent, the lowest in last 41 years and only the sixth instance of contraction since FY52.

The proactive intervention of the Reserve Bank of India (RBI) notwithstanding, said Ind-Ra, the spillover impact of COVID-19 has percolated into the financial markets as well, choking the credit channels and raising the risk aversion.

Risk aversion across financial sector participants coupled with slow banking credit growth will have a second-round impact on the GDP growth. Ind-Ra’s retail inflation estimate for FY21 is 3.6 per cent. Retail inflation had breached the RBI’s upper bound of 6 per cent in December 2019 and peaked in January 2020 before the receding prices of vegetables, fruits, and petroleum products brought it down to 5.9 per cent in March 2020.

As the threat to headline inflation has receded lately due to adequate buffer stocks in cereals, good rabi harvest, record decline in global crude prices, and low pricing power of firms. Even the RBI now expects the retail inflation to fall to 2.7 per cent in 3Q FY21 and 2.4 per cent in 4Q FY21.

On the fiscal front, the dip in tax and non-tax revenue due to the lockdown and growth slowdown coupled with the need to provide fiscal stimulus will destabilise the fiscal arithmetic of both union and state governments. Even without any significant fiscal stimulus, Ind-Ra expects the fiscal deficit of the union government to escalate to 4.4 per cent of GDP in FY21 and a stimulus package of Rs 4 lakh crore will push it to 6 per cent of GDP.