Icra sharply revises forecast, expects the economy to shrink by 9.5% in FY21

Credit rating agency on Thursday sharply revised its forecast on the contraction in the to 9.5 per cent for 2020-21 from its earlier assessment of five per cent.

It attributed the revision to the climbing infections resulting in a spate of localised lockdowns in some states and cities, arresting the nascent recovery that had set in during May-June 2020.

Icra's projection, in fact, is the sharpest contraction in the gross domestic product (GDP) for FY21 among all estimations so far. At an individual level, former chief statistician Pronab Sen expects a steeper decline in the economy, at 12.5 per cent for the year.

has projected the to have contracted by a sharp 25 per cent in the first quarter of the year. The rating agency now expected a shallower recovery in subsequent quarters, with a contraction of 12.4 per cent in the second quarter against an earlier forecast of 2.1 per cent, and a fall of 2.3 per cent in Q3 against 2.1 per cent earlier, followed by an 'anaemic' growth of 1.3 per cent in the fourth quarter against five per cent earlier.

Aditi Nayar, principal economist at Icra, said, “Given the severity of the pandemic and the duration of the safety measures that need to be employed, we now expect a deeper pace of GDP contraction in Q2FY21, relative to our earlier forecast. We also anticipate more unevenness, as different regions move in and out of lockdowns, and persisting labour supply mismatches affecting supply chains and consumption patterns.”

She said the timeline for a firmer recovery out of the contractionary phase is now being pushed ahead to at least the fourth quarter from the third quarter.

 

"This presumes that a vaccine will be widely available by then, which now appears necessary for discretionary consumption to recover in certain sectors such as travel, hospitality, and recreation,” Nayar added.

However, on the positive side, expects the rural economy to partly counter the slowdown in the urban economy. The agency remained optimistic regarding the outlook for agricultural growth and rural consumption.

Benefiting from favourable moisture conditions, seasonally high reservoir levels, and returnee labourers at least in some parts of the country, more than half of the 2019 kharif acreage has already been covered.

Icra thus continued to expect agricultural gross value added (GVA) to rise by 3.5-4 per cent in FY21, supporting rural sentiment.

The rating agency, however, tempered its expectations on the extent of fiscal support that may be forthcoming, given the revenue shock being experienced by various levels of governments.