Mumbai: Ratings agency Crisil on Monday revised upwards its FY21 GDP contraction estimate to 7.7 per cent from the earlier expectation of 9 per cent, and termed lower government spending as a “constraint” for growth.
The agency, which is a unit of Standard & Poor’s, said a faster than expected revival in the economic activity in the second quarter, which continued in the festival season, is the prime reason for the upward revision in its estimate.
It said the pandemic, which has pushed the economy into contraction mode, will result in a permanent loss of 12 per cent in real GDP terms.
After its initial expectation of 9.5 per cent GDP contraction in FY21, the Reserve Bank revised up its estimate to 7.5 per cent earlier this month. Other analysts have also revised upwards their projections as the unlocking of economy led to higher activities.
“A faster-than-expected revival in activity in the second quarter, which continues into the festive season, is one of the reasons for the revision. Consistent decline in the overall Covid-19 case load is the other,” the research wing of the rating agency said in a note on Monday.
It said “inadequate fiscal spending” remains a “constraint” for economic growth, and pointed out a possible second wave of COVID afflictions, uncertainty regarding availability of vaccine, and hiccups in global economic revival due to resurgence of cases as factors which call for caution.
The agency, however, said that the GDP will grow by 10 per cent in FY22 on a very low base of previous fiscal year.
The newer estimate on a lower contraction has considered a better than expected growth in manufacturing sector in the second quarter, lighter restrictions as people’s attitudes shift to learning to live with the virus and a flattening of the infection curve.
It has also considered that “fiscal policy support, which hitherto remains inadequate to revive demand” could be forthcoming.
“Direct fiscal spending support by the government has been inadequate to galvanise demand. The government estimates the total support package announced by it (including monetary measures by the RBI) at over 15 per cent of GDP, but the direct spend in the current fiscal is much less at around 2 per cent of GDP,” the agency said.
It can be noted that the GDP contracted by 23.9 per cent in April-June 2020 period as compared to the year-ago period, with contraction slowing down to 7.5 per cent in September quarter.
The note from Crisil, however, made it clear that it may be early to say that conclusive recovery has started, and pointed to challenges like higher infections and also higher inflation which constrains the RBI’s ability to push rate cuts.
Meanwhile, Crisil’s peer Brickworks Ratings also revised upwards its estimate on GDP to a contraction between 7-7.5 per cent on the back of slowing down of contraction in Q2FY21 data.
