S&P follows its peers, slashes India’s Growth forecast!

S&P follows its peers, slashes India’s Growth forecast!

Last updated: 16 Sep, 2020 | 07:46 am

S&P follows its peers, slashes India’s Growth forecast!

FY21 GDP growth forecast  at -9%

  • “S&P Global Ratings slashed India’s FY21 growth forecast to -9% from -5% estimated earlier, attributing the cut to the rising COVID-19 cases which would keep private spending and investment lower for longer.'
  • Notably, last week, Moody’s revised downwards its forecast on India’s GDP growth for  FY21 to -11.5%, while Fitch estimated India's economy to contract by10.5%. Goldman Sachs has estimated India's FY21 growth to decline by 14.8%.
  • S&P projects India’s GDP growth to be at 10% in FY22 majorly because of a favourable base effect.
  • Surprise in Q1FY20 GDP: 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 was steeper than expected.

Comments On Fiscal Concerns 

  • India’s elevated deficits will limit the scope for large fiscal stimulus, while the potential for further monetary support is curbed by inflation worries, the rating agency said. 
  • 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.
  • The RBI  has cut down the repo rate to an extent of 115 basis points in 2020 to 4%. However, the spike in retail inflation in the past months and hence the bank’s resistance for further rate cuts has created complexities for the central bank

Sluggish Economic Recovery

  • Even with the ease in lockdowns, the pandemic continues to have dampening effects on economic activity and the economic growth has been much more gradual than anticipated.
  • As long as the virus remains widespread, consumers will be cautious in going out and spending and hence firms will be under strain, with the increasing rate of COVID 19 cases this remains a leading problem.
  • S&P said even as the industrial activity is recovering faster than services, high frequency indicators suggest that output is still lower relative to the same period last year and hence growth for the July–September quarter will be a negative year on year.
  • Once the moratorium ends and if credit quality worsens, the recovery will slow down further. 
  • “S&P said that one factor that presents a potential upside to growth is the availability of a widely-distributed COVID vaccine earlier than its current estimate of around mid-2021”

INDmoney Analysis

  • While Apr-Jun GDP has seen a massive hit, economic data in June and July show some 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