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India’s fiscal 2021 real gross domestic product (GDP) is now expected to contract 7.7 per cent compared with a contraction of 9 per cent forecast in September, according to Crisil.
The credit rating agency reasoned that a faster-than-expected revival in activity in the second quarter, which continues into the festival season, is one of the reasons for the revision.
“Inadequate fiscal spending, however, remains a constraint, while the possibility of a second wave of afflictions, uncertainty regarding availability of vaccine, and hiccups in global economic revival due to resurgence of cases, call for caution,” according to a report by a team of economists led by Dharmakirti Joshi, Chief Economist, Crisil.
Pent-up demand, support from agriculture and select export sectors, and cost savings for corporates, engineered recovery in the second quarter, they added.
For fiscal 2022, Crisil expects GDP growth to shoot up to 10 per cent supported by a very weak base and some benefit as the global economy fares better and provides a lift to India’s exports.
Services will take longer to recover than manufacturing.
Beyond that, the agency sees growth averaging at about 6.2 per cent annually between fiscal 2023 and 2025.
“In this scenario, a catch-up to trend GDP is unlikely in the next three fiscals,” the note said.
“We estimate the permanent loss on account of this at about 12 per cent in real GDP terms. Even with that, India is seen growing faster than the world beyond fiscal 2022,” the report said.
Lack of fiscal space
Crisil observed that the government estimates the total support package announced by it (including monetary measures by the RBI) at over 15 per cent of GDP, but the direct spend in the current fiscal is much less at around 2 per cent of GDP.
Given the lack of fiscal space, the Centre appears to have designed its measures to do more with less, the agency said.
The government has jacked up its borrowing programme to raise resources for spending (due to a hit to revenue) and redirected spending towards areas that need more attention, it added.
“But direct government spending to boost demand in the current fiscal remains inadequate given the massive hit to the economy.
“Our outlook assumes that the Centre will raise direct spending in the coming months to support the economy,” the note said.
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