Goldman Sachs and Fitch Ratings on Tuesday forecast a deeper-than-previously estimated economic recession for India in fiscal year 21, arguing that limited fiscal support, fragilities in the financial system and a continued rise in coronavirus cases are hampering a rapid normalization of economic activity.
Investment bank Goldman Sachs anticipates that India’s gross domestic product (GDP) will contract by 14.8% this fiscal year from its previous estimate of a contraction of 11.8%. Fitch Ratings, meanwhile, cut its growth forecast for India for fiscal year 21 to a 10.5% contraction, more than double the 5% contraction projected in June.
The latest estimates from Fitch and Goldman Sachs are among the worst for the Indian economy this fiscal year, which may make it the deepest contraction so far in Indian history. The previous low was a 5.2% GDP contraction in fiscal 1980.
India’s economy contracted 23.9% in the June quarter at the fastest pace in four decades. It was the worst performance among G20 nations, and significantly below the expectations of most economists, as the strict COVID-induced national lockdown created a double whammy through a shock to both supply and supply. lawsuit, as businesses closed their operations while consumers were forced to stay home. .
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“In light of the second quarter GDP report (June quarter), we are making further significant adjustments to our GDP forecast for India. We now forecast the third quarter (September quarter) of 2020 and the fourth quarter (December quarter) of 2020 with GDP growth of -13.7% year-on-year and -9.8% year-on-year, respectively (versus -10, 7% year-on-year and -6.7% year-on-year previously). Our estimates imply that real GDP falls 11.1% in calendar year 2020 and 14.8% in fiscal year 21 (compared to growth of -9.6% and -11.8% in our previous forecasts ), “Goldman Sachs said in a research note.
However, Goldman Sachs improved its expectations for a rebound next year. “In the second quarter (June quarter) of 2021, we expect real GDP growth to recover sharply year-on-year due to favorable base effects. Assuming ~ 70% of lost production in June 2020 is recovered in June 2021, we expect real GDP in Q2 2021 at + 27.1% YoY. Going forward, assuming a step towards more normal levels of sequential growth, we now expect average annual GDP growth in CY21 and FY22 at 9.9% and 15.7%, respectively (compared to 3.8% and 7.0% previously). Our forecasts assume that, in level terms, actual production in March 2022 would still be ~ 2% below its level in March 2020, “he added.
In its latest World Economic Outlook for 2020, Fitch revised its estimate of world GDP to a contraction of 4.4% from a contraction of 4.6% estimated in June, as it raised its growth estimates for the US. (0.6%) and China (2%). . Fitch said its 2020 global GDP estimate is weighed down by deeper contractions expected in India, the eurozone and the UK.
The rating agency said India’s GDP should rebound strongly in the September quarter amid the economy reopening, but there are signs that the recovery has been slow and uneven. “The PMI balances have recovered, but they imply that the level of activity is still well below its pre-pandemic level in 3Q20 (September quarter). The still depressed levels of imports, sales of two-wheelers and the production of capital goods indicate a moderate recovery in domestic spending, “he added.
Fitch said multiple challenges are holding back the recovery in India, both in the short and medium term. “New cases of coronavirus continue to increase, forcing some states and territories of the Union to reaffirm restrictions, although these localized containment measures are generally less strict than in March-April. The continued spread of the virus and the imposition of sporadic closures depress sentiment and disrupt economic activity, “he added.
The severe slump in economic activity has also hurt household and business income and balance sheets, amid limited fiscal support, the rating agency said. “An imminent deterioration in the quality of assets in the financial sector will hold back the provision of credit amid weak bank capital buffers,” he added.
Fitch said the recent outbreak of inflation has added strains to household incomes. “Disruptions in the supply chain and increases in excise duties have caused prices to rise. However, we expect inflation to slow amid weak underlying demand, a decrease in supply chain disruptions and a good monsoon, “he added.
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