India\'s GDP to contract by 5.3% due to COVID-19 \'disorder\': India Ratings

However, the agency believes the GDP growth will bounce back in the range of 5 to 6 per cent in FY22

Mumbai: India's gross domestic product (GDP) will contract by 5.3 per cent year-on-year in the current financial year (FY21), marking the lowest growth rate in the country's history and sixth instance of economic contraction, India Ratings and Research (Ind-Ra) said on Wednesday.

"The disorder caused by Covid-19 pandemic unfolded with such speed and scale that the disruption in production, breakdown of supply chains and trade channels, and total wash out of activities in aviation, tourism, hotels and hospitality sectors will not allow the economic activity to return to normalcy throughout FY21," it said.

As a result, besides contracting for the whole year, GDP will contract in each quarter in FY21. However, the agency believes the GDP growth will bounce back in the range of 5 to 6 per cent in FY22 aided by the base effect and return of gradual normalcy in the domestic as well as the global economy.

The government announced an economic package of Rs 20.97 lakh crore (10 per cent of GDP) on May 12 to mitigate the adverse impact of Covid-19 and related lockdown.

However, Ind-Ra's calculations, excluding the monetary measures and existing proposals in the Union Budget show that the direct fiscal impact is only Rs 2.14 lakh crore (1.1 per cent of GDP).

The credit and liquidity enhancing measures announced in the economic package in combination with some of the earlier steps announced by the Reserve Bank of India (RBI) will certainly address the supply-side issues of the economy, said Ind-Ra.

The Indian economy even before the Covid-19 related lockdown was suffering on the demand side as all the demand drivers, except government final consumption expenditure (GFCE) like private final consumption expenditure (PFCE), gross fixed capital formation (GFCF) and net exports were floundering.

The lockdown and its impact on the economy and livelihoods only aggravated the sagging consumption demand. Ind-Ra said the government is aware of it. But the near absence of demand-side measures in the economic package indicates the hard budget constraint facing the government.

The external environment continues to be challenging due to Covid-19 related restrictions coupled with trade friction and protectionist policy pursued by many developed economies.

Ind-Ra expects merchandise exports to decline 9.4 per cent year-on-year in FY21 (FY20: negative 4.9 per cent) as all major export commodities will clock negative growth.

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