GDP growth at 1.9 pc in FY21 to be lowest in 29 years: Ind-Ra



India Ratings and Research (Ind-Ra) on Monday revised its FY21 gross domestic product (GDP) growth further down to 1.9 percent, the lowest in the last 29 years (FY92: GDP grew 1.1 percent) based on the assumption that the partial lockdown will continue till mid-May.

On March 30, it had forecast a growth of 3.6 percent. Ind-Ra's estimate suggests that GDP may come back to the 4Q FY20 level only by 3Q FY21, anticipating the resumption of normal economic activities during 2Q FY21 and festive demand during 3Q FY21.

However, if the lockdown continues beyond mid-May and a gradual recovery takes root only from end-June 2020, GDP growth may slip further to negative 2.1 percent, the lowest in the last 41 years, and only the sixth instance of contraction since FY52.

The proactive intervention of the Reserve Bank of India (RBI) notwithstanding, said Ind-Ra, the spillover impact of COVID-19 has percolated into the financial markets as well, choking the credit channels and raising the risk aversion.

Risk aversion across financial sector participants coupled with slow banking credit growth will have a second-round impact on the GDP growth.

Ind-Ra's retail inflation estimate for FY21 is 3.6 percent. Retail inflation had breached the RBI's upper bound of 6 percent in December 2019 and peaked in January 2020 before the receding prices of vegetables, fruits and petroleum products brought it down to 5.9 percent in March 2020.

As the threat to headline inflation has receded lately due to adequate buffer stocks in cereals, good rabi harvest, record decline in global crude prices, and low pricing power of firms. Even the RBI now expects the retail inflation to fall to 2.7 percent in 3Q FY21 and 2.4 percent in 4Q FY21.

On the fiscal front, the dip in tax and non-tax revenue due to the lockdown and growth slowdown coupled with the need to provide fiscal stimulus will destabilize the fiscal arithmetic of both union and state governments.

Even without any significant fiscal stimulus, Ind-Ra expects the fiscal deficit of the union government to escalate to 4.4 percent of GDP in FY21 and a stimulus package of Rs 4 lakh crore will push it to 6 percent of GDP.

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