India Ratings  Cuts FY21 GDP Growth Further To 1.9%, Lowest In 29 Years
Farmers transport harvested wheat by tractor on a deserted street during a partial lockdown in Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

India Ratings Cuts FY21 GDP Growth Further To 1.9%, Lowest In 29 Years

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India Ratings and Research on Monday revised its growth forecast for India further down to 1.9 percent financial year 2020, the lowest in the last 29 years, citing the Covid-19 pandemic and its impact on economy.

The rating agency said the revised number is based on the assumption that the partial lockdown will continue till mid-May.

It, however, sees GDP growth to slip further to negative 2.1 percent if the lockdown continues beyond mid-May.

"We have revised our FY21 Gross Domestic Product growth further down to 1.9 percent from our forecast of 3.6 percent published on March 30, 2020," its principal economist and director public finance Sunil Kumar Sinha said in a report.

Also read: Spreading Virus Prompts Steep Cuts In India Growth Forecasts

The country’s economy had grown by 1.1 percent in FY92.

“However, 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 percent, lowest in the last 41 years,” Sinha said, adding it will be only the sixth instance of contraction since fiscal year 1952.

Many global and domestic research agencies have also cut their FY21 growth forecast for the country amid the Covid-19 pandemic and its impact on economy.

Also read: In Chart: India’s GDP Growth Slump This Year Could Be Sharper Than Expected

The agency said the Reserve Bank of India, on March 27, had announced reduction in repo rate by 75 basis points, cut in the cash reserve ratio by 100 basis points to 3 percent and a Targeted Long Term Repo Operations worth Rs 1 lakh crore, focused on easing the tight monetary conditions building up in the economy. However, the financial market reacted otherwise.

Sinha said due to risk aversion, deployment of TLTRO funds so far has largely been into the bonds issued by public sector entities and large corporates.

Also read: Economists See India GDP Growth Plunge On Coronavirus Impact

Given the uncertainty surrounding the Covid-19 pandemic and its impact on economy, he said the risk aversion is likely to continue and funds available under TLTRO 2.0 may also not flow to the targeted segment -- investment-grade bonds, commercial papers, and non-convertible debentures of NBFCs, with at least 50 percent of the total amount going to small and mid-sized NBFCs and Microfinance Institutions.

"This risk aversion across financial sector participants coupled with slow banking credit growth will have a second round impact on the GDP growth, he said.

The rating agency further said the dip in tax/non tax revenue due to the lockdown/growth slowdown coupled with the need to provide fiscal stimulus will destabilise the fiscal arithmetic of both union and state governments.

Also read: Coronavirus Impact: Fitch Cuts India GDP Growth Forecast To 5.1% For FY21

Even without any significant fiscal stimulus we expect 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 would push it to 6 percent of GDP, Sinha said.

The budget estimate of fiscal deficit for FY21 is 3.5 percent of GDP.

The agency expects retail inflation for FY21 at 3.6 percent.

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