S&P Joins Chorus, Says Indian Economy Will Shrink 5% in FY21, Stimulus Package Too Low

New Delhi: S&P Global Ratings on Thursday said the Indian economy would shrink by 5% in the current fiscal as it joined a chorus of international agencies that are forecasting a contraction in growth rate due to coronavirus lockdown halting economic activity.

Stating that COVID-19 has not yet been contained in India, the rating agency in a statement said the government stimulus package is low relative to countries with similar economic impacts from the pandemic.

"The COVID-19 outbreak in India and two months of lockdown -- longer in some areas -- have led to a sudden stop in the economy. That means growth will contract sharply this fiscal year (April 2020 to March 2021)," it said. "Economic activity will face ongoing disruption over the next year as the country transitions to a post-COVID-19 world."

Forecasting a 5% contraction in 2020-21 (versus 1.8% growth forecast it made in April), S&P said growth is expected to pick up to 8.5% in the following fiscal (up from the previous forecast of 7.5%). The GDP is projected to expand by 6.5% in FY23 and 6.6% FY24.

Earlier this week, Fitch Ratings and Crisil, too, projected a 5% contraction for the Indian economy.

While Fitch Ratings had stated that India has had a very stringent lockdown policy that has lasted a lot longer than initially expected and incoming economic activity data have been spectacularly weak, Crisil had said the country's fourth recession since Independence, first since liberalisation, and perhaps the worst to date, is here.

On Thursday, Fitch Solutions (which is separate from Fitch Ratings) forecast real GDP to contract by 4.5% in FY2020-21 saying "high unemployment will depress consumer spending, while widespread economic uncertainties will curb investment in the private sector.

Moody's Investors Service on May 8, forecast a 'zero' growth rate for India in FY21.

In the past 69 years, India has seen a recession only thrice – as per available data – in fiscal year 1958, 1966 and 1980. A monsoon shock that hit agriculture, then a sizeable part of the economy, was the reason on all three occasions.

This time round, agriculture is not the reason but a dent to industrial and economic activity caused by lockdown, which was first imposed on March 25. The lockdown has been extended thrice till May 31 with some easing of restrictions.

S&P Global Ratings expects varying degrees of containment measures and economic resumption across India during this transition.

"COVID-19 has not yet been contained in India. New cases have been averaging more than 6,000 a day over the past week as authorities begin easing stringent lockdown restrictions gradually to prevent economic costs from blowing out further. We currently assume that the outbreak peaks by the third quarter," it said.

India has grouped geographical zones into red, orange, or green categories based on the number of cases. Areas currently classified as red zones are also economically significant, and the authorities could extend mobility restrictions.

"We believe economic activity in these places will take longer to normalise. This will have knock-on impacts on countrywide supply chains, which will slow the overall recovery," it said.

The rating agency said high-frequency data for April showed major economic costs for India - purchasing managers index (PMI) for the services sector was 5.4, on a scale where anything below 50 indicates a contraction of business activity from the previous month for the sector.

Also, service sectors, which account for high shares of employment, have been severely affected, thus leading to large-scale job losses across the country. Workers have been geographically displaced as migrant workers travelled back home before the lockdown, and this will take time to unwind as lockdown measures are lifted.

"We expect that employment will remain depressed over the transition period," it said.

S&P said India has limited room to manoeuver on policy support. The Reserve Bank of India has cut policy rates by 115 basis points but banks have been unwilling to extend credit. Small and mid-size enterprises continue to face restricted access to credit markets despite some policy measures aimed at easing financing for the sector.

"The government's stimulus package, with a headline amount of 10 per cent of GDP, has about 1.2 per cent of direct stimulus measures, which is low relative to countries with similar economic impacts from the pandemic. The remaining 8.8 per cent of the package includes liquidity support measures and credit guarantees that will not directly support growth," it said.

The rating agency said the big hit to growth will mean a large, permanent economic loss and a deterioration in balance sheets throughout the economy.

"The risks around the path of recovery will depend on three key factors. First, the speed with which the COVID-19 outbreak comes under control. Faster flattening of the curve -- in other words, reducing the number of new cases -- will potentially allow faster normalization of activity. Second, a labour market recovery will be key to getting the economy running again. Finally, the ability of all sectors of the economy to restore their balance sheets following the adverse shock will be important. The longer the duration of the shock, the longer recovery," it added.

Acknowledging a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak, it said some government authorities estimate the pandemic will peak around mid-year, and that has been used as an assumption in assessing the economic and credit implications.