Press Trust of india

Ind-Ra revises FY21 GDP contraction to 7.8% on easing pandemic headwinds

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Mumbai:  Citing the better-than-expected recovery in second quarter and the faster than anticipated easing of the pandemic headwinds, India Ratings on Thursday projected 7.8 per cent contraction for the economy for 2020-21 as compared to 11.8 per cent degrowth estimated earlier.

But the agency was quick to question the sustainability of the recovery seen in September quarter when the Indian economy  contracted only 7.5 per cent, after 23.9 contraction in April-June , saying ”a significant part of the impetus came from the festival and pent-up demand.”

Although the headwinds emanating from the pandemic-related challenges are unlikely to go away till mass vaccination becomes a reality, the economic agents and economic activities not only have learnt to live with it but are also adjusting swiftly to the new reality, it said.

Given this, Ind-Ra now expects third quarter to see contraction at 0.8 per cent and fourth quarter to print in 0.3 per cent growth as against the earlier expectation of positive numbers only in July-September 2021-22.

Accordingly, it expects 7.8 per cent contraction in 2020-21 as against (-) 11.8 per cent earlier, and GDP to grow by 9.6 per cent in 2021-22, mainly due to the weak base of 2020-21, India Ratings chief economist Devendra Pant said in a report.

The better-than-expected Q2 numbers came in from manufacturing/electricity and other utilities with positive growth numbers, while mining and construction saw significant reduction in contraction.

But the same is not true for the contact-intensive services sectors like trade, hotel, realty, and tourism and they are likely to remain subdued for some more time due to social distancing norms and risk aversion, the agency said.

Agriculture has been a bright spot even through the lockdown and continues to be so, riding on the back of good monsoons. The agency expects 3.5 per cent growth for agriculture and contraction of 10.3 per cent and 9.8 per cent for industry and services , respectively, in 2020-21.

According to the agency, while government expenditure is expected to clip in at just 3.3 per cent due to significant expenditure cuts, exports could fall 7.9 per cent due to a combination of the ongoing trade conflicts and the pandemic increasing the uncertainty in the global economy.

Government expenditure declined 22.2 per cent and gross value-added of public administration and defence declined 12.2 per cent in the second quarter.

It expects the retail and wholesale inflation to average 6.8 per cent and (-)0.3 per cent respectively in 2020-21  providing very little headroom to the Reserve Bank to make any changes in the policy rates.

Inflation has been hovering at 5-5.8 per cent since May indicating cost-push pressures.

FY21 fiscal deficit, budgeted at 3.5 per cent, was at 119.7 per cent of the budget estimate in October primarily because of the sharp decline in receipts, which by October were 31.5 per cent of the estimate, whereas expenditure was 54.6 per cent.

The agency expects the fiscal deficit of the Centre to print in at 7 per cent of GDP in FY21 while the current account to be in surplus at 1.1 per cent of GDP and even the capital account is expected to record a surplus of USD67.3 billion.

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