Fitch Slashes India’s GDP and Fiscal deficit forecasts!
Last updated: 08 Sep, 2020 | 01:17 pm
Surprise in the Q1 GDP numbers
- India’s GDP contracted 23.9% YoY in Q1FY21, as lockdowns imposed to control the spread of Coronavirus pandemic curtailed economic activity. As expected, this was the worst GDP contraction witnessed in at least 40 years, and also the first GDP decline since India began publishing quarterly GDP numbers in 1996.
- While analysts had earlier expected a fall of about 18% in Q1 GDP. The fall has been steeper than expected. The near 24% decline in India’s GDP was almost double than what Fitch had forecasted.
FY21 GDP growth forecast at -10.5%
- “Fitch Ratings on Tuesday slashed India's FY21 growth projection to -10.5%, from -5% estimated earlier because of the continued spread of the virus and the imposition of sporadic shutdowns across the country which have depressed sentiment and disrupted economic activity”.
- The rating agency said that the deepest recessions were in India, the UK and Spain, countries that saw particularly large shocks in daily mobility data on visits to retail and recreation venues, and where lockdowns were stringent and long-lasting throughout April-June 2020.
- Fitch projects India’s GDP growth to be at -9.6 per cent in Q2FY21, -4.8% in Q3FY21 and 4% in Q4FY21.
FY21 fiscal deficit forecast revised to 8.2% of GDP from 7.2%.
- Fitch revised India’s fiscal deficit forecast to 8.2% of GDP, it said that this is due to a quicker than previously anticipated divergence in expenditures and non-debt receipts, which saw the deficit exceed the full-year target in only four months.
- The rating agency also expects the government to maintain its spending expansion through the issue of new government securities which will be absorbed by the banking sector as the threshold for SLR (Statutory Liquidity Ratio) has been raised by the RBI to 22% from 18% until March 2021.
- Notably, India's fiscal deficit in the four months to end July stood at Rs 8.21 lakh crore or 103.1% of the budgeted target for the current fiscal year.
Sluggish Economic Recovery
- The rating agency said that there are signs 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.
- A 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 household income
- For the next fiscal, Fitch estimates the Indian economy to grow 11%, while for 2022 growth would be at 6 %.
- High growth in 2021 simply reflects the low base in 2020 -21, Fitch does not expect GDP to return to pre-virus levels until Q4FY22.
- While Apr-Jun GDP has seen a massive hit, economic data in June and July show green shoots of recovery however a full-blown economic recovery seems to be at least a few quarters away
- While companies are laden with debt and the financial sector will take a hit, there is still demand in the economy, However, with the spread of COVID gaining pace across the country, further shutdowns continue to be the biggest factor to impede recovery
- Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
- Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up