COVID-19 lockdown extension | India’s FY21 GDP may contract to -1% in FY21: ICRA

India’s gross domestic product (GDP) could contract in FY21 on account of the extension of the nationwide lockdown announced to fight the spread of novel coronavirus, or COVID-19, rating agency ICRA said on April 14. Going by this projection, GDP could slip to negative one percent at the lower end, the agency stated.

“With the fluidity of the situation thwarting precise forecasts, ICRA currently projects Indian GDP to contract in a range of 10-15 percent in Q1 FY21, which would translate to a bleak full year growth band of +/-1 percent in FY21,’ Aditi Nayar, Principal Economist, ICRA, said.

This is, perhaps, the first projection that suggests Indian GDP could fall into a negative zone. “The size of the GDP shrinkage would be contingent on the extent to which a graded resumption in activities is permitted in some areas post April 20, and the magnitude by which government spending is stepped up to cushion the blow from the lockdown,” Nayar added.

Historically, on a current price basis, we have never seen contraction in India’s annual GDP growth. But on a constant price basis, we have seen negative growth two times in FY66 and FY80, Centre for Monitoring Indian Economy (CMIE) data revealed.

Earlier in the day, Barclays emerging markets research has cut India’s 2020 GDP forecast to zero from 2.5 percent earlier. The British brokerage has revised down its FY21 GDP growth forecast further to 0.8 percent from 3.5 percent earlier.

“Combined with the disruption in several service sectors, we now estimate that the economic loss will be close to $234.4 billion (8.1 percent of GDP), assuming that India will remain under a partial lockdown at least until the end of May. This is much higher than the $120 billion we had estimated earlier for roughly the same time period previously," the brokerage said in a release.

On April 14, Prime Minister Narendra Modi said in a televised statement that the nationwide lockdown will be extended till May 3. India just completed a 21-days lockdown announced in late March. Post April 20, some areas may see partial relaxation depending upon the trend on virus infections, Modi said.

What does a GDP contraction mean? The GDP of an economy is the sum of the economic activities happening on the ground. A decline in the GDP figure points to corresponding fall in output across sectors. A likely contraction in GDP will have catastrophic impact on production, employment and tax collection.

Even before COVID-19 hit India, the economy was slowing significantly. India is already fighting a major unemployment crisis. According to Centre for Monitoring of Indian Economy (CMIE), the unemployment level in India peaked to 23 percent in the recent weeks. This scenario could worsen further if the GDP slips into negative terrain.