India Ratings & Research (Ind-Ra), a Fitch group company, has further slashed its estimate for India’s Gross Domestic Product (GDP) growth rate to 1.9 per cent for 2020-21. This will be the lowest after India recorded growth rate at 1.1 per cent in 1991-92.

In a note on Monday, the agency revised its estimate from the March 30 announcement of 3.6 per cent GDP growth to 1.9 per cent. “It is based on the assumption that the partial lockdown will continue till mid-May,” Sunil Kumar Sinha, Principal Economist, Ind-Ra, said.

The complete lockdown due to Covid-19 is scheduled to end on May 3. However, there is the thinking that it should continue in contaminated zones/hotspots for some more time. The agency’s estimate suggests that GDP may come back to the 4QFY20 (January-March, 2020) level only by 3QFY21 (October-December, 2020), anticipating resumption of normal economic activities during 2QFY21 (July-September) and festive demand during 3QFY21.

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 per cent, lowest in the last 41 years and only the sixth instance of contraction since FY 1951-52.”

The agency’s estimate is at par with IMF (1.9 per cent) and close to World Bank (1.5-2.8 per cent), but lower than ADB (4 per cent).

Covid impact

The agency further mentioned that the proactive intervention of the Reserve Bank of India (RBI) notwithstanding, the spillover impact of Covid-19 has percolated into the financial markets as well, choking credit channels and raising risk aversion.

“There is no dearth of liquidity in the system,” Sinha said, adding that the RBI injected liquidity worth about 3.2 per cent of GDP since February 2020 and the systemic liquidity surplus, as reflected in net absorptions under the liquidity adjustment facility, averaged ₹4.36 trillion during March 27-April 14. Yet, the spread between the repo rate and capital market instruments such as benchmark G-sec, AAA Corporate bond, commercial paper of NBFCs, which was either flat or declining since the beginning of March 2020, started inching up after March 13. The spread rose abruptly in the range of 50-80 bps (100 basis points or bps mean 1 percentage point) on the next day of RBI’s Monetary Policy Statement and has remained thereabout since then.

It is due to this kind of risk aversion that deployment of TLTRO (Targeted Long Term Repo Option) funds so far has largely been into the bonds issued by public sector entities and large corporates. Given the uncertainty surrounding the pandemic and its impact on economy, Ind-Ra believes the risk aversion is likely to continue and funds available under TLTRO 2.0 may also not flow to the targeted segment i.e. investment-grade bonds, commercial papers, and non-convertible debentures of NBFCs, with at least half of the total amount going to small and mid-sized NBFCs and microfinance institutions (MFIs).

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

Retail inflation

Ind-Ra’s retail inflation estimate for FY21 is 3.6 per cent. Retail inflation had breached the RBI’s upper bound of 6 per cent in December 2019 and peaked in January 2020, before the receding prices of vegetables, fruits and petroleum products brought it down to 5.9 per cent in March 2020.

On the fiscal front, 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. Even without any significant fiscal stimulus Ind-Ra expects the fiscal deficit of the Centre to escalate to 4.4 per cent of GDP in FY21 as against Budget Estimate of 3.5 per cent.

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