India’s Real GDP Growth Likely To Contract 5.2% In FY21, Says Nomura

India’s real gross domestic product growth is likely to contract 5.2 percent in the financial year ending March 2021, according to Nomura, which lowered its outlook on the economy amid an extended lockdown.

That’s against a contraction of 0.4 percent projected earlier. “We now expect year-on-year growth to remain negative for three consecutive quarters — with growth faltering to 1.5 percent in Q1 2020 (January-March) before plunging to -14.5 percent in Q2 (April-June), and then weakly recovering to -6.0 percent in Q3 (July-September) and -1.5 percent in Q4 (October-December),” the research house said in a statement.

To be sure, a contraction in growth for more than two straight quarters with visible unemployment is said to be a recession. But the National Bureau of Economic Research, which officially declares recession, defines that as a significant decline in economic activity across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Nomura also sees India’s fiscal deficit at 7 percent of GDP, double its target for the year. This comes as the government said it would borrow Rs 12 lakh crore in 2020-21, a sharp increase from the original budget estimate of Rs 7.8 lakh crore (by around 2 percent of GDP).

“The government’s decision to finally raise its market borrowings by over 2 percent of GDP signals its acceptance that the fiscal deficit will slip by materially more than what is allowed under the escape clause,” the note said. “It also signals that a second fiscal support package is around the corner.”

This still may not be the end of an expansion in borrowings, the research house said, adding that while the extra borrowing announced may take care of the ‘natural’ fiscal slip due to faltering growth, it will not be enough to cover extra Covid-19 fiscal support. “We see a risk of more extra-borrowing announcements in H2 FY21, as the full extent of the fiscal slip becomes evident,” it said.

Moreover, a low to negative growth with this fiscal impulse means the fiscal deficit is likely to be inflationary, it said, warning of a rating downgrade from Moody’s.

“In light of its weak fiscal starting point, poor fiscal track record, adverse debt dynamics due to the slump in nominal GDP growth and an adverse impact on growth due to a fragile financial sector, we believe there is an imminent risk of a ratings downgrade by Moody’s to Baa3 ‘stable’ from Baa2 ‘negative, which would bring it on par with S&P and Fitch, and see a risk of Fitch changing its outlook for India to negative,” it said.

(Corrects an earlier version that misstated contraction in GDP growth instead of real GDP growth.)