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S&P predicts India's GDP to contract 9% in FY21.


Date: 26-09-2020
Subject: S&P predicts India's GDP to contract 9% in FY21
New Delhi: India's GDP will experience a record contraction in FY21 due to the Covid crisis with some 'enduring' damage while a weakening fiscal position will constrain the government’s ability to support the economy, S&P Global Ratings said on Friday. The rating agency affirmed India’s long-term foreign and local currency sovereign credit rating at BBB- with a stable outlook and maintained its short-term rating at A-3, pointing to the country’s improved external account. S&P expects the economy to contract 9% in FY21 though there will be a sharp pickup to 10% growth in FY22 due to the base effect, it said. In the absence of fiscal room, the government’s ability to bring more economic reforms, especially those that boost investment and jobs, will be critical to recovery prospects.

“India’s economy has been hard hit by the confluence of the Covid-19 pandemic, the country’s own cyclical slowdown, and strict domestic containment measures against the coronavirus,” it said in the ratings report, adding that the economy had slowed measurably before the pandemic. “The government’s reluctance to provide greater direct fiscal support to the economy likely reflects preexisting fiscal constraints owing to years of high fiscal deficits.” The government had announced a Rs 20 lakh crore revival package in May to address the fallout of the pandemic, but fiscal support was seen at less than Rs 2 lakh crore. “Although additional stimulus may help to avert a steeper downturn this year, it would also further strain the government’s weak finances,” the rating agency warned.

The government has been saying it will take necessary measures when needed but hasn’t committed itself to any big fiscal package. It has already raised its borrowing target for FY21 to Rs 12 lakh crore from Rs 7.8 lakh crore estimated in the February budget. S&P pegged the combined central and state fiscal deficit at 12.5% of GDP along with public debt at 90% this fiscal year. “The near-term fiscal impulse to the economy is limited, and some damage to the real economy from India’s deep economic downturn this year could be enduring,” it said.

LONG-TERM OUTPERFORMER

S&P said direct government expenditure under India’s stimulus programme is limited to about 1.2% of GDP so far, against roughly 3% of GDP on average in other emerging markets. The Indian economy will remain a long-term outperformer versus peers with a similar level of income, S&P said, pointing to its strength in demographics and low labour costs.

The government’s overwhelming majority in Parliament may help accelerate economic reforms. “The central government has recently approved three labour reform bills that should help to liberalise employment practices in the country, especially at SMEs (small and medium enterprises) with fewer than 300 employees,” S&P said. Additional reforms announced in May 2020 - higher foreign direct investment (FDI) in defence, liberalisation of domestic agricultural produce markets, easing of restrictions on commercial mining - indicate that the government remains mindful of the need for reforms to boost productivity over the long run, it said.

RATING OUTLOOK

“The stable outlook reflects our view that India’s contraction in fiscal 2021 will be followed by a significant recovery, which will stabilise the country’s broader credit profile,” S&P said. The outlook was underpinned by India’s above-average, long term real GDP growth, sound external profile, and policy stability, it said.

Source:-economictimes.indiatimes.com

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