Over the last few weeks, there have been a slew of projections for GDP growth for FY2021. We are currently in the first quarter of FY21 (Mar-Jun) and hence the variables are too fluid to form a considered opinion. However, most of the full year GDP projections including CRISIL, ICRA, Fitch, Goldman, Morgan Stanley and Nomura veer towards (-5%) contraction in GDP for FY21. How realistic are these projections and could there be a positive surprise on GDP for FY21? There are 4 situations that can give a positive surprise for GDP.
Stimulus starts to take effect right away
One possibility is that the stimulus of Rs20 trillion announced by the government could take effect sooner than expected. Most economists have argued that the stimulus would only have an impact from FY22 onwards. However, there is another way to look at it. The government has started aggressively cutting interest rates on small savings. The cancellation of the 7.75% government bonds is an indication that the government and RBI want to push yields lower. The impact is evident with most banks transmitting rate cuts to borrowers and also simultaneously cutting the deposit rates. Banks have already cut FD rates by 50-60 basis points and there could be more cuts in the offing. If the rates come down rapidly, we could see an explosion in credit and growth too. Of course, the FY21 growth may still be flat to marginally negative but nowhere as bad as (-5%).
Global fiscal stimulus reverses the slowdown
One thing markets learnt in 2008 was that slowdowns can be averted, or at least mitigated, if right monetary and fiscal policies are implemented. Most central banks have moved rapidly. The US brought down its rates to 0% even before the pandemic hit in a big way. In
addition, the US government has announced a stimulus at $2.35 trillion while Japan has announced a stimulus of $2.1 trillion. EU and China are not lagging behind. Even India has been relatively quick off the block. Unlike in 2008, when India dithered over rate cuts for too long, this time around RBI has cut rates by 115 bps in less than 2 months. Coupled with the Rs20 trillion stimuli and a revival in global consumer and producer demand, India could be poised to improve on its growth estimates for FY21.
Vengeance buying could boost consumption
Most financial advisors have been asking their clients not to indulge in vengeance buying immediately after the lockdown is lifted. But that is easier advised than done. There is a lot of pent up demand; both offline and online. For close to 2 months the ecommerce websites were not allowed to deliver non-essentials. Hence we could be up against a huge pent-up demand getting released in the next few months. It would mean that after a weak June quarter and some lag effect in September, the growth could come back sharply in the next few months. EMI moratoriums have been extended till August 31 and more than 30% of the borrowers have availed the facility. That means; cash flows should still be comfortable to indulge in vengeance buying. That could be a real boost for consumption.
Government stays liberal on fiscal deficit front
The budget target of 3.2% fiscal deficit for FY21 already looks impractical. The government has already announced a 55% spike in the annual borrowing target from Rs780,000 crore to Rs12,00,000cr . That would clearly put the FY21 fiscal deficit at closer to 5%. Then there is the added risk of weak inflows from GST, direct taxes and disinvestments, which will widen the fiscal deficit. If the government is prepared to temporarily run a fiscal deficit of around 6-7% for just this one year, it can look to taper it in the next couple of years. In a global pandemic, rating downgrades have limited value. If the government can bring itself to drive a pump priming approach to growth, the recovery could be much faster. It has been observed that most analysis tends to be overly pessimistic and cynical in the midst of a crisis. If the government stays aggressive on stimulus and consumption also picks up, we could see a less vicious FY21 before returning to growth in FY22.