HSBC Estimates India’s GDP To Contract 7.2% This Fiscal

India’s GDP is expected to contract 7.2% in the ongoing financial year despite a spurt in economic activity as the lockdown curbs are eased, according to HSBC India’s Chief Economist Pranjul Bhandari.

With the economy emerging from a near three-month lockdown, activity will tick up led by pent-up demand that got postponed, Bhandari wrote in a report. “But after that passes, India may lack a strong growth driver.”

While the worst may have passed, a mix of problems may weigh on the economic recovery, she said. This includes a relatively small fiscal stimulus by the government, reduced spending as consumers turn thrifty, lower labour availability due to reverse migration and lack of liquidity in pockets of the financial sector.

HSBC used a new forecasting method to ascertain the share in the GDP of sectors that were not operational during the lockdown period. It then shaved off their contribution from what the GDP might’ve been without the pandemic to make its fresh forecast. Consequently, it estimates GDP to contract 16.1% in the first half of FY21 over the same period last year, and projects a 1.3% growth y-o-y in H2.

With a negative output gap of over 6% in FY21, there is more policy space for rate cuts, the report said. HSBC expects two more cuts of 25 basis points each, taking the repo rate to 3.5% by December. With inflation seen at 3.5% over the next year, the rate cuts could mean zero real rates for the remainder of the year, HSBC said.

FY21-22 Forecast

While HSBC estimates the GDP to grow 7.2% in the next fiscal 2021-22, that would come on a low base and would be 11% lower than where it would have been without the pandemic.

What Happens After The Pandemic?

HSBC expects India to see a lower growth trend after the pandemic. Potential growth—the highest level of output that can be sustained by a country—will fall 1 percentage point to 5%.

This would be the lowest level since the turn of the millennium, HSBC said. “And the risk, if any, is that potential growth could fall even more than estimated.”

HSBC sees potential economic growth as a blend of three components: capital stock, human capital and the total factor productivity.

The potential growth in India started sliding from FY18 due to weaker capital and lower labour input, the report said. Risk-aversion by banks and non-banking financial companies in the aftermath of the IL&FS crisis led to slower credit growth, and in turn, lower GDP growth.

HSBC said neither of the three components will go back to pre-pandemic levels by FY23. Labour displacement and financial sectors stress are two key aspects that will likely weigh down on growth in FY21.

Only undertaking reforms that tackle bad loans, land, labour and the power sector can help push potential growth back up, HSBC said. The priority should be the reforms that help clean up corporate and bank balance sheets, like a more efficient insolvency mechanism.

“The balance sheets of the government and consumers are not in a state to help much. Only reforms can, in our view.”