India Ratings & Research (Ind-Ra) has cut the country’s FY21 growth forecast to a 29-year low of 1.9 per cent from 3.6 per cent estimated earlier, assuming that the partial lockdown to counter the COVID-19 pandemic will continue till mid-May. In case the lockdown continues beyond that, Ind-Ra then expects gross domestic product (GDP) growth to slip into negative territory, contracting to a 41-year low of 2.1 per cent.
“… if the lockdown continues beyond mid-May 2020 and a gradual recovery takes root only from end-June 2020, GDP growth may slip further to negative 2.1 per cent, lowest in the last 41 years and only the sixth instance of contraction since FY52,” Sunil Kumar Sinha, principal economist, Ind-Ra said. Many global and domestic research agencies have already cut India’s growth forecast for this fiscal. The IMF expects the Indian economy to grow 1.9 per cent, while the World Bank has made a projection of 1.5-2.8 per cent.
On the fiscal front, lower tax and non-tax revenue due to lockdown and slowdown, along with the need to provide fiscal stimulus, will “destabilise the fiscal arithmetic of both union and state governments”, Ind-Ra said. “Even without any significant fiscal stimulus, Ind-Ra expects fiscal deficit of the government to escalate to 4.4 per cent of GDP in FY21 (FY21 Budget Estimate: 3.5 per cent of GDP) and a stimulus package of INR4 trillion would push it to 6.0 per cent of GDP.”
The agency, in its report, said that GDP may come back to the January-March FY20 level only by October-December FY21, due to resumption of normal economic activities during July-September FY21 and festive demand during October-December FY21.
On the recent measures taken by the Reserve Bank of India (RBI) that included a cut in repo rate by 75 basis points (bps), cut in the cash reserve ratio by 100 bps to 3 per cent and a targeted long term repo operations (TLTRO) worth Rs 1 lakh crore, it said the steps were focussed on easing the tight monetary conditions building up in the economy but the financial market reacted otherwise.
“… the spread between the repo rate and capital market instruments, such as benchmark G-sec, AAA corporate bond, commercial paper of NBFCs, which were either flat or declining since the beginning of March 2020, started inching up after 13 March 2020. The spread rose abruptly in the range of 50-80 bps on the next day of RBI’s Monetary Policy statement and have remained thereabout since then. It is due to this kind of risk aversion that deployment of TLTRO funds so far has largely been into the bonds issued by public sector entities and large corporates,” Sinha said.
Given the uncertainty surrounding the pandemic, the agency expects the risk aversion to continue, saying that the funds available under TLTRO 2.0 may also not flow to the targeted segment i.e. investment-grade bonds, commercial papers, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount going to small and mid-sized NBFCs and microfinance institutions.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines