Icra scales up projection for GDP contraction to 11% from 9.5% earlier

 Rating agency Icra has revised its forecast for the contraction in the gross domestic product (GDP) to 11 per cent from its earlier assessment of 9.5 per cent for 2020-21, with fresh Covid-19 infections remaining elevated at the end of the second quarter of the year. With this, most agencies now projected double digit de-growth in GDP for the current financial year (see chart).

However, Icra retained its earlier forecast of fall in GDP at 12.4 per cent in the second quarter. The agency revised its projections for GDP decline to 5.4 per cent from 2.3 per cent for the third quarter and to 2.5 per cent form earlier projection of 1.3 per cent growth in the fourth quarter. The economy had shrunk an unprecedented 23.9 per cent in the first quarter.

“We expect construction as well as trade, transport, hotels, communications and services related to broadcasting to recover with the longest lag and continue to underperform the rest of the economy. We believe the gross value added (GVA) at basic prices for these sectors would record a contraction even in Q4 despite the favourable base effect, resulting in the overall GVA and GDP continuing to record a decline in growth in that quarter,” ICRA principal economist Aditi Nayar said.

Icra cautioned that if the pace of GDP decline in the first quarter got revised below the initial estimate after data for the MSME and less formal sectors became available, the overall economic contraction for FY21 could be even worse than the ratings agency’s expectations'.

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Nevertheless, higher government spending, a faster global recovery, and an early decline in fresh Covid-19 cases could impart an upside to these forecasts.

However, the revenue shock being experienced by the Central and the state governments would limit the extent of fiscal support that may be forthcoming and result in protracted fears about deferral of both the capex and the release of timely payments. Moreover, fresh restrictions being imposed on major trading partners following a new wave of Covid-19 cases, could cap the extent of further improvement in exports in the near term.

Nayar said, “With the pandemic continuing in India for over six months, we sense that economic agents are now adapting to the crisis, resulting in a graduated recovery to a new post-Covid normal. Nevertheless, with rampant Covid-19 infections, we expect behaviours to remain altered for longer than what we had earlier presumed. This would continue to depress activity in some sectors, especially where social distancing is difficult such as travel, tourism and recreation. Additionally, the continued economic uncertainty and health concerns would result in a prolonged impact on consumption and investment decisions.”