Rating agency Crisil has cut the country’s GDP growth forecast for the next financial year to 3.5% from 5.2% projected earlier, due to the spread of COVID-19.
“We have slashed our base-case gross domestic product (GDP) growth forecast for fiscal 2021 to 3.5% from the 5.2% expected earlier. This assumes two things: a normal monsoon, and the effect of the pandemic subsiding materially, if not wearing out, in the April-June quarter,” said Dharmakirti Joshi, chief economist, Crisil.
Mild recovery in H2
“The slump in growth will be concentrated in the first half of the next fiscal, while the second half should see a mild recovery,” he said.
According to the rating agency, COVID-19 is now the foremost risk for the world economy with multi-dimensional ramifications because, and unlike the global financial crisis of 2008, it has not only slammed the brakes on economic activity and jeopardised financial stability, but also brought with it enormous human suffering not seen in decades.
“Since our last forecast of 5.2% GDP growth for fiscal 2021, the scenario has worsened notably. S&P Global has marked global growth down significantly, predicting a likely recession in the U.S. and the Eurozone, and lowering China’s growth to 2.9% from 4.8% with dominant downside risks,” the rating agency said, adding the pandemic in India and the consequent lockdown for 21 days posed a material risk to India’s economic outlook. The impact of social distancing and decline in discretionary spending will aggravate the downturn in the April-June quarter, and the sharp slowdown in key trading-partner economies will hit exports.
Services, which account for 41% of total exports, have been resilient so far, but a recession in the advanced economies would dampen the prospects for IT-ITeS, tourism and bring down services’ exports growth.
On inflation, Crisil said it may soften in FY21 for three reasons; one, the abnormal surge in food inflation in 2019 has started to correct; two, core inflation will remain moderate with slowing growth; and three, the sharp drop in crude prices will keep fuel inflation soft.
“With base effect also kicking in, the second half of next fiscal should see a perceptible drop in inflation,” the rating agency said.