Aditi Nayar, Principal Economist, ICRA, says, “The Indian economy had started to recover from the troughs experienced in April 2020, when the lockdown was at its severest, and many sectors seemed to be adjusting to a new normal. However, the unabated rise in Covid-19 infections in the unlock phase and re-imposition of localised lockdowns in several states, appear to have interrupted this recovery. 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 Q2 FY2021 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.”
“The timeline for a firmer recovery out of the contractionary phase is now being pushed ahead to at least Q4 FY2021 from Q3 FY2021. 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,” Ms. Nayar added.
However, on the positive side, ICRA expects the rural economy to partly counter the slowdown in the urban economy. ICRA remains optimistic regarding the outlook for agricultural growth and rural consumption. Benefitting 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, continues to expect agricultural GVA to rise by 3.5-4% in FY2021, supporting rural sentiment.
“The recovery in tractor sales in May 2020 suggests that rural consumer confidence was relatively insulated during the lockdown. Moreover, the reverse migration of a large portion of migrant workers back to the rural areas, suggests a shift in where consumption will take place at the bottom of the pyramid, “Ms. Nayar opined.
ICRA has, however, tempered its expectations regarding the extent of fiscal support that may be forthcoming, given the revenue shock being experienced by various levels of governments. “Overall, we have revised our forecast of the contraction in Indian GDP in FY2021 to 9.5% from our previous expectation of 5.0%”, Ms. Nayar added.
The available data up to June 2020 provided some broadly encouraging cues of a gradual, yet uneven recovery across different sectors relative to the troughs experienced in April 2020. For instance, from a situation of virtually no production in April 2020, the output of passenger vehicles, scooters and motorcycles resumed in May 2020, and recorded a YoY de-growth of 57.7%, 74.2% and 42.4%, respectively, in June 2020. Moreover, the contraction in petrol and diesel consumption narrowed sharply to 13.6% and 15.4%, respectively, in June 2020 from 60.4% and 55.5%, respectively, in April 2020.
However, the re-imposition of lockdowns in some states has arrested this recovery. Data on electricity consumption signals a mild worsening in the pace of contraction to 4.9% for the week ending July 13, 2020 from 3.7% for the week ending July 6, 2020. Additionally, data on mobility sourced from Google indicates a plateau in the recent weeks.
ICRA expects the Indian economy to have contracted by a sharp 25.0% in Q1 FY2021. Given the aforesaid concerns, the ratings agency now expects a shallower recovery in the subsequent quarters, with a contraction of 12.4% in Q2 FY2021 (previous exp.: -2.1%) and a milder 2.3% in Q3 FY2021 (previous exp.: +2.1%), followed by an anaemic growth of 1.3% in Q4 FY2021 (previous exp.: +5.0%).