Mumbai: The Indian economy will contract 9% in 2020-21 as coronavirus infections are still at their peak and the government is not providing adequate direct fiscal support, the Crisil rating agency said Thursday.
In May, Crisil had estimated that the economy would contract 5%. The latest projection comes days after official data for the June quarter showed a 23.9% contraction in the economy.
Crisil said the 9% contraction will be the highest since the 1950s.
The government had announced a ₹Aid package of Rs 20 crore lakh, but real new spending was less than 2% of GDP.
“With the peak of the pandemic not yet in sight and the government not providing adequate direct fiscal support, the downside risks from our previous forecast have materialized,” the agency said.
“A stretched fiscal position has prevented the government from spending more to support the economy. To date, the policy drive toward growth remains silent, except in pockets. Our May forecast had assumed additional direct fiscal support of 1% of GDP, which has not been met, “the agency said.
He added that if the pandemic were to peak in September-October, GDP growth could move into slightly positive territory towards the end of this fiscal year.
India has overtaken Brazil as the second worst affected country with more than 42 lakh of coronavirus cases.
Even as many analysts have been advocating a strong rally or V-shaped recovery, Crisil said the pandemic will leave a “permanent scar.”
“We expect a permanent loss of 13 percent of real GDP in the medium term,” he said, setting its value in nominal terms at ₹30 lakh crore and added that this is much higher than a permanent 3 percent impact on GDP in Asia-Pacific economies estimated by its parent S&P.
A “catch-up” to the value of the pre-pandemic trend in real GDP would require average real GDP growth to rise to 13 percent annually over the next three fiscal years, a feat never before accomplished by India, he said.
He stated that GDP for the September quarter would contract by 12 percent, attributing the same to greater economic activity observed in many indicators.
His peer, Icra, said Thursday that it expects the second-quarter GDP contraction to be between 11 and 13 percent and maintain its 9.5 percent contraction for 2020-21.
Crisil said that agriculture will grow 2.5 percent in the current fiscal year and made it clear that the sector does not have the weight to offset the strong contraction in other sectors of the economy that account for 85 percent of GDP.
Consumption, a pillar of growth in recent years, will “sink” this year despite the help it will receive from rural areas, Crisil said, adding that a recovery in investment seems “distant” at present.
He said high inflation is also limiting the ability of monetary policy to react to growing concerns about growth.
GDP growth will hit 10% in 2021-22 on a lower basis, but the agency said the medium-term outlook for the economy is likely to trend downward.
“The truth with reforms is that you take the bullet first and reap the benefits later. The government needs to take more steps to address the current pain in the economy. It should endeavor fiscally to support vulnerable households and small businesses that have been severely affected by the pandemic, “the agency said.
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