India’s Economic Scorecard Improves As GDP Estimates Revised Higher
A quicker than expected rebound in India’s economic activity has prompted economists to tweak their estimates for GDP contraction in the current financial year. Economists, however, continue to warn that medium-term risks remain and the Covid damage to the Indian economy will be substantial.
The Indian economy contracted by nearly a quarter in the April-June 2021 period. The steeper than expected contraction had prompted economists to downgrade their estimates for the full year. Now, ahead of the release of the second-quarter GDP data, economists are revising their forecasts higher. Strengthening high-frequency indicators and hope of a vaccine are driving the upgrades.
- Moody’s revised its GDP forecast to a contraction of 10.6% in FY21, compared to a contraction of 11.5% estimated earlier. India is estimated to grow by 10.8% in FY22, compared with its earlier forecast of 10.6%
- Goldman Sachs, which forecast the steepest contraction in GDP, now estimates it to fall 10.3% in FY21 as against a drop of 14.8% penciled in September. For FY22, GDP growth is estimated to rebound to 13% compared to 15.7% estimated earlier.
- Barclays downgraded its forecast but remains the most optimistic. It estimates GDP to contract by 6.4% in FY21, compared to a 6% drop forecast previously. It now estimates GDP to grow 8.5% in FY22, compared to 7% projected previously.
- Oxford Economics estimates a contraction of 9.5% in FY21, compared to a contraction of 11.1% forecast earlier.
- State Bank of India’s economic research units now expects the economy to contract 10.7% in the second quarter compared to a decline of 12.5% forecast earlier.
The SBI business activity index shows that there is continuous improvement and Q3 numbers could be even better. However, the extent of recovery in subsequent quarters can only be gauged after the actual Q2 [GDP] numbers are published.Soumyakanti Ghosh, Chief Economist, SBI
Not all economists have revised their forecasts higher.
CARE Ratings and India Ratings & Research have decided to hold onto their respective forecasts of a contraction of 8.2% and 11.8% respectively. Others await the second-quarter GDP data.
According to a nowcasting model published in the central bank’s bulletin in November, GDP is estimated to have contracted by 8.6% in Q2FY21, implying that India is amidst a technical recession for the first time in its history with two successive quarters of GDP contraction. The central bank expects the economy to grow once again in the third quarter.
Mid-Term Challenges Persist
Despite the revision in forecasts for the ongoing and the next financial year, concerns over India’s mid-term growth outlook remain.
Beyond 2020, while India will remain one of the most rapidly growing economies, that isn’t enough to preclude a large medium-term output loss in the wake of Covid-19, said Priyanka Kishore, India head at Oxford Economics.
We forecast India’s growth equilibrium to worsen substantially over the medium term, with potential growth averaging just 4.5% over 2020-2025 in our latest baseline, as opposed to our pre-virus forecast of 6.5%.Priyanka Kishore, Head of India and South East Asia Economics, Oxford Economics
Stressed corporate balance sheets, elevated non-performing assets of banks, the fallout in non-bank financial companies, and labour market weakness – pre-existing structural drags in the Indian economy are likely to worsen further, Kishore said. India’s weak fiscal response to the pandemic is playing a role in magnifying the structural drags, she added.
Goldman Sachs added that weak labour markets are likely to weigh on the pace of consumption rebound going forward, while private investments are likely to continue to drag.
Writing in the Business Standard, Sajjid Chinoy, chief India economist at JP Morgan highlighted the lag in labour market rebound and the unequal distribution of the economic rebound. “If GDP is poised to contract in the July-September quarter, yet listed company profit growth is so strong and indirect taxes are recovering quickly, what does that tell us? That profits of smaller, unlisted firms and labour income (wages and employment) suffered sharp contractions last quarter. This, in turn, could have meaningful implications for future growth and income inequality,” Chinoy wrote.
Ghosh of SBI shared that view. There is no doubt that the economy has suffered and scarring remains, he wrote.
“The good performance in the listed space shows that the dichotomy between the formal and informal sectors has become more pronounced with formal sector doing better than informal sector and the recovery in the small and medium firms in listed space does not translate to overall better situation in the MSME space,” he said.