ICRA warns of deep recession, GDP to contract 5% in FY21

Domestic rating agency Icra on Wednesday warned of a deep recession as it drastically lowered FY21 growth forecast for India to minus 5 percent, citing the very modest fiscal support, extension of the nationwide lockdown and looming labour shortage.

The agency also sharply revised downwards the growth contraction in Q1 to 25 percent as against the previous forecast of 16-20 percent and to minus 2.1 percent in Q2 from 2.1 percent growth previously, which implies a recession.

Though the government has been claiming that its economic stimulus package is worth 10 percent of GDP or Rs 20.9 lakh crore, analysts have pegged it at just 0.8 - 1.2 percent of the GDP.

After the two phases of the nationwide lockdown, many experts warned of a minor contraction in growth.

But with the lockdown being extended to end-May, and expectation of substantial delays in getting the supply chains operational following the return of millions of migrant workers to their home states, Q1 degrowth will be deeper, and recovery will be shallower and more delayed than our earlier assessment, Icra said.

"Accordingly, we now expect FY21 growth to contract by a whopping 5 percent relative to our earlier expectation of 1-2 percent," its Chief Economist Aditi Nayar and Economist Aarzoo Pahwa said in a note.

Icra sees Q1 GDP contracting by 25 percent as against previous forecast of 16-20 percent and Q2 growth contracting by 2.1 percent from a 2.1 percent growth expected previously.

However, the economy may see a moderate 2.1 percent growth in Q3 (against previous estimate of 3.6 percent growth) and 5 percent in Q4.

The much-touted Rs 20.97 lakh crore package includes Rs 8.02 lakh crore monetary measures announced by the Reserve Bank since February as well as the Rs 1.93 lakh crore initially announced by the Centre and revenue foregone due to tax concessions.

According to Icra, these announcements are only enabling provisions to support a recovery after the lockdown by helping the most stressed sectors get working capital credit. None of these offer to absorb their losses from the lost output for more than two months, it said.

Moreover, the reforms announced will have any meaningful outcomes only with a lag of a few years.

"Overall, we estimate the direct fiscal cost of this package to be limited to 1 percent of GDP, or around 10 percent of the total announcements," they said, adding these measure will not be able to counter the demand destruction caused by the pandemic, or address the prevailing supply chain infirmities.

While the agency had earlier forecast a V-shaped recovery, it warned that if there is a second wave of infections and subsequent lockdowns either in India or globally, the ensuing demand uncertainty and supply chain hiccups may result in a W-shaped economic cycle.

On the labour issue, it said multiple extensions of the lockdown has created uncertainty and untold misery to the poor migrant workers forcing them to flee to their villages.

"With a considerable portion of their savings likely to have been used up over the last two months, we feel that they may choose to delay their return to the cities until after the festive season is over, which could affect the pace of normalisation in various economic activities, including manufacturing and construction," it added.

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