Favourable monsoon helped Agriculture cushion the blow
Rising COVID-19 cases in India will keep private spending and investment lower for longer, says S&P Global Ratings which now expects the country’s economy to contract by 9% in the current fiscal year ending 31 March 2021.
The previous forecast put the Indian economic hit from COVID at -5%.
“One factor holding back private economic activity is the continued escalation of the COVID-19,” said Vishrut Rana, Asia-Pacific Economist for S&P Global Ratings.
India’s economy shrank 23.9% year over year in the March to June period, larger than we expected. The pandemic, and tight lockdown measures enforced to combat it, knocked private consumption by 26.7% while fixed investment sunk 47.1%. Higher welfare spending prevented an even sharper fall in growth.
Agriculture cushioned the blow as it was the only major sector to expand, thanks to a favorable monsoon season, said S&P on 14 Sept 2020.
While India eased lockdowns in June, S&P believes the pandemic will continue to restrain economic activity. As long as the virus spread remains uncontained, consumers will be cautious in going out and spending and firms will be under strain.
“Activity did begin to recover during the post-lockdown phase, albeit more gradually than we anticipated earlier. One indicator that can provide a reference for normalization in the economy is mobility, which reflects the degree to which households are travelling out for various purposes such as shopping,” said the rating agency.
According to data from Google, mobility for retail and recreation was around 40% below baseline in the first week of September compared with 60% down on average during the March-June period.
“We believe the industrial activity is recovering faster than services. However, high-frequency indicators suggest that output is still lower relative to the same period last year and hence growth for the June–September quarter will be negative year on year.
“The potential for further monetary support is curbed by India’s inflation worries,” said Rana.
The Reserve Bank of India has cut policy rates by 115 basis points so far this year, to 4%. However, rising food inflation has pushed inflation to 6.9% in July, higher than the upper band of the central bank’s 2%-6% target range. This will constrain the central bank from cutting policy rates further.
“We expect a degree of normalization to result in the growth of about 10% in the following fiscal year as consumers resume the discretionary activity that they are curtailing during the pandemic. A significant part of the growth rebound is due to the very weak base during the current fiscal year.
“We also do not expect policymakers to enforce further widespread lockdowns. The larger adverse shock to growth will be driven by corporate balance sheet damage, with small and midsize enterprises closing shop, and larger firms holding back capital expenditure, which will constrain their growth capacity.
“We now expect a larger permanent loss in output of 13% over the next three years. We expect growth of 6.0% in fiscal 2022 and 6.2% in fiscal 2023. Before the pandemic, we expected India’s economy to expand 6.5% in the current fiscal year,” said S&P. #economy #growth #industry #COVID-19 #policymakers /fiinews.com
