Goldman Sachs to Fitch: Global rating agencies cut India’s GDP forecast

Global rating and research houses, such as Fitch and Goldman Sachs, have cut their estimates for growth in India’s gross domestic product (GDP) for the current fiscal 2020-21 (FY21). While Fitch now expects the country’s GDP to contract 10.5 per cent in FY21 versus its earlier estimate of 5 per cent contraction in this period, Goldman Sachs forecasts a sharper contraction at 14.8 per cent (-11.8 per cent forecasted earlier) in FY21 and 11.1 per cent (-9.6 per cent earlier) in calendar year (CY20).

The downward revision in India’s forecast for FY21 comes on the heels of a sharp contraction in Indian economy in the April–June 2020 period, when the GDP came in at a negative 23.9 per cent year-on-year (YoY), the worst performance in nearly four decades.

“The severe fall in activity has damaged household and corporate incomes and balance sheets, amid limited fiscal support. A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers. Furthermore, high inflation has added strains to the household income,” Fitch said.

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A common thread that runs through the commentary of both is the hope of a faster recovery going ahead. Fitch expects the GDP to rebound strongly in the third quarter of calendar year 2020 (Q3-20) as the economy re-opens. However, does it caution that the recovery has been sluggish and uneven.

“The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in Q3-20. Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending,” Fitch said.

FY21 GDP forecast

Assuming around 70 per cent of the lost output in June 2020 is recovered in June 2021, those at Goldman Sachs peg real GDP in Q2-2021 at +27.1 per cent YoY and average annual GDP growth in CY21 and FY22 at 9.9 per cent and 15.7 per cent, respectively.

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“While the economy must now climb out of a deeper trough in 2020, we have upgraded our expectations of a rebound next year. In Q2-2021, we expect real GDP growth to bounce back sharply on a year-over-year basis due to favorable base effects. Our forecasts assume that in level terms, real output in March 2022 would still be around 2 per cent below its level in March 2020,” wrote Prachi Mishra and Andrew Tilton of Goldman Sachs in a September 7 note.

On its part, India Ratings – a Fitch Group company – has also lowered its expectations for India’s economic growth in FY21 to -11.8 per cent from -5.3 per cent forecasted earlier. “The economic loss in FY21 is estimated to be Rs 18.44 trillion. However, GDP is expected to rebound and grow at 9.9 per cent YoY in FY22 mainly due to the weak base of FY21,” said Devendra Pant, chief economist and senior director for Public Finance, India Ratings & Research.

Global View

Fitch expects global GDP to fall by 4.4 per cent in 2020, a modest upward revision from the 4.6 per cent decline expected earlier. The recovery in economic activity after the unprecedented severe coronavirus-related recession in March and April has been swifter than anticipated, Fitch said, but they expect the pace of expansion to moderate soon.

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“China has already regained its pre-virus level of GDP and retail sales in the US, France and the UK now exceed February levels, but we doubt this will become the much-lauded V-shaped recovery. Unemployment shocks lie ahead in Europe, firms are cutting capex, and social distancing continues to directly constrain private-sector spending”, said Brian Coulton, chief economist, Fitch Ratings.

Chetan Ahya, chief economist and global head of economics at Morgan Stanley, on the other hand, expects the global and developed market (DM) economies to reach their respective pre-Covid-19 levels by early third quarter of FY21 (Q3FY21).

“The quick recovery since May means that the global economy will reflate faster than we initially expected. As the forces that drive inflation higher continue to align, we now see a stronger case for our call that inflation will re-emerge in DMs, particularly the US, in a different manner from the last three cycles,” Ahya wrote in a co-authored September 7 report.