Special: Indian economy could recover 'earlier than expected'

Even ratings firm India Ratings, a Fitch Group firm, has forecast a revival in fiscal year 2022.

Indian economy, the worst-hit among major economies in the wake of the pandemic outbreak, will have an earlier than expected rebound, notwithstanding some sharp downward revisions forecast by global economists and ratings agencies.
Hopes for a recovery "earlier than otherwise predicted by economists" dawned as American investment bank Goldman Sachs and Japanese research firm Nomura came up with their reassessment of the overall situation with Asia's third largest economy battered by the debilitating impact of a prolonged Covid-19 related lockdown.
While Nomura has found some green shoots of recovery in September, Goldman Sachs voiced optimism for a full-bound recovery by 2021 for the economy "worst-hit among major economies." Even ratings firm India Ratings, a Fitch Group firm,  has forecast a revival in fiscal year 2022.
The renewed optimism of a slow but eventual recovery comes in the wake of some of the starkest economic data for the first quarter of the current fiscal year revealing a historic contraction of 23.9 per cent over the three months of April, May and June. India's GDP during the fourth quarter of the last fiscal stood at 3.1 per cent, with overall growth during the fiscal pegged at 5.2 per cent.
On Tuesday, Fitch Ratings slashed its FY21 gross domestic product forecast for India to a contraction of 10.5 per cent from a contraction of five per cent estimated in June, holding that limited fiscal support, fragilities in the financial system, and a continued rise in coronavirus cases hamper rapid normalization in activity.
Fitch said India imposed one of the most stringent lockdowns worldwide in the second quarter of 2020 and domestic demand fell massively.
"Limited fiscal support, fragilities in the financial system, and a continued rise in virus cases hamper a rapid normalisation in activity. The double-digit growth rate we expect for 2021-22 simply reflects the low base in 2020. We do not expect GDP to return to pre-virus levels until the first quarter of 2022-23," the ratings agency said.
Goldman Sachs' economists, on seeing the economy climbing out of a deeper trough in 2020, have upgraded their expectations of a rebound next year. "In Q2 2021, we expect real GDP growth to bounce back sharply on a year-over-year basis due to favorable base effects," Prachi Mishra and Andrew Tilton said after sharply cutting their 2020-21 India GDP forecast to a contraction of 14.8 per cent. The investment bank had earlier estimated that India, which is now home to the second-largest number of Covid-19 infections, to contract by 11.8 per cent.
The US investment bank assumes that 70 per cent of the lost output in June 2020 is recovered in June 2021. Real GDP in Q2 2021 --April-June 2021  --- is pegged at 27.1 per cent year-on-year. Going forward, assuming a step down to more normal levels of sequential growth, Goldman expects average annual GDP growth in calendar year-CY21 and fiscal year-FY22 at 9.9 per cent and 15.7per cent respectively (relative to 3.8 per cent and 7.0 per cent before). "Our forecasts assume that in level terms, real output in March 2022 would still be minus 2.0 per cent below its level in March 2020," the economists said.
ome economists argue that urgent governmental interventions on reviving the economy must focus on sectors that employ large numbers and whose multiplier impacts are substantial. Of these, manufacturing is down by about 40 per cent, construction down by roughly 50 per cent, and trade, hotels, etc., are down by 47 per cent, by the first quarter output data for 2020-21. While agriculture has grown marginally, at 3.4 per cent, this sector supports half our population and still needs assistance. Additionally, India's large informal economy has been paralyzed badly, but the GDP figures do not fully capture the magnitude of this devastation as more than 40 per cent of India's GDP is informal, meaning there is no data even on an annual basis.
issacjohn@khaleejtimes.com