Indian economy may eke out a marginal GDP growth in Q4

Aditi Nayar, Principal Economist, ICRA, cautions that while industrial indicators are recovering post the June quarter when GDP decline was recorded at -23.9%, services sector growth in the Indian economy has stalled. She is cautiously optimistic that the monsoon, reservoir and kharif sowing situation can support 3-3.5% agricultural growth in 2020-21.

IBT: India’s GDP decline in the June quarter by 23.9% has been worse than analyst projections. What are the main areas where the economy has fallen short of the already weak expectations and why?

Aditi Nayar: We had projected a 25% fall in the Indian GDP in Q1 FY2021, and the data put out by the NSO is nearly in line with that. As expected, construction, manufacturing and trade, hotels, transport, communication and services related to broadcasting, which together account for 45% of the economy, drove the deep contraction seen in Q1 FY2021.

Surprisingly, public administration, defense and other services also posted a contraction of 10.3% in Q1 FY 2021.  Agricultural growth, which benefitted from the favourable rabi harvest, printed modestly lower than our forecast of 4%. Excluding agriculture, GVA contracted by an even sharper 26.8% in Q1 FY 2021.

IBT: How do you view the pace of the recovery given the numbers emerging post June in terms of manufacturing, services, infrastructure, consumer demand, farm activities, consumer demand, foreign trade, investments (public and private), etc? What do you view as the key drivers of a possible economic revival in coming quarters?

Aditi Nayar: Our assessment is that while the industrial indicators are continuing to recover, partly benefiting from pent up demand as well as base effects, the momentum of the recovery has stalled in the services sectors. For instance, coal output recorded a sharp growth in August 2020, whereas the de-growth in electricity generation and GST collections largely stagnated.

We remain cautiously optimistic that the monsoon, reservoir and kharif sowing situation can support a 3-3.5% agricultural growth in FY 2021.

On the other hand, we continue to expect regional and sectoral unevenness in the pace of recovery of the non-agricultural sectors, going forward.

IBT: What is your outlook on India’s economic growth trajectory in the current fiscal year? What are the downside risks that could impact this projection?

Aditi Nayar: With COVID-19 infections continuing to climb, especially outside the major urban centres, and some states extending local lockdowns further, the economic outlook remains uncertain.

Our assessment is that Indian GDP (at constant 2011-12 prices) will de-grow in both Q2 FY2021 and Q3 FY2021, although the pace of the contraction may narrow in these quarters relative to Q1 FY2021. We are cautiously hopeful that the economy may be able to eke out a marginal growth in Q4 FY 2021, benefiting from the base effect related to the last fiscal, although this remains contingent on how soon the COVID-19 infections can be brought under control.

As of now, we maintain our forecast that the Indian economy will contract by a sobering 9.5% in FY 2021. The main downside risks to this forecast are second waves of infections globally, no respite in the climbing count in India, and delay in vaccines availability.

IBT: Government spending is a critical aspect of economic revival. But given that fiscal deficit has exceeded the budgetary target in 4 months, what are the options in front of the government?

Aditi Nayar: The Government of India’s (GoI) fiscal deficit surged by 50% in YoY terms to Rs. 8.2 trillion in April-July 2020, and exceeded the budget estimate for the full year, in just these four months, revealing the extent of fiscal stress being faced in this unprecedented crisis.

With the localised lockdowns arresting the recovery in many sectors, the pace of the contraction in the GoI’s gross tax revenues recorded only a subdued improvement to 20% in July 2020 from 23% in June 2020.

ICRA expects the net tax revenues of the Centre, non-tax revenues and disinvestment proceeds to together trail the budgeted level by a sharp Rs. 6.0 trillion in FY2021.

Taking into account the fiscal support announced by the GoI under the “Aatma Nirbhar Bharat Abhiyan”, and assuming moderate savings from the expenditure management measures that have been put in place, our baseline estimate is that the GoI’s fiscal deficit will surge to Rs. 13.5 trillion in FY2021 from the budgeted level of Rs. 8.0 trillion.

We expect the GoI’s borrowing programme for H2 FY 2021 to undergo an upward revision, which will clarify to what extent further fiscal support may be forthcoming from the Government to bolster a recovery.

IBT: When and how do you see the element of discretionary consumption stepping back into the equation?

Aditi Nayar: We expect consumption trends to remain altered by the pandemic, with non-discretionary and in-home consumption being prioritized over the next two quarters. Discretionary consumption will return only once economic uncertainty recedes, and a vaccine makes people feel safe in activities where social distancing is difficult to maintain.