2020-07-13 14:05:00
Indian Economy

A longer wait for a vaccine against COVID-19 virus may lead to a contraction of up to 7.5% in the Indian GDP in FY21, a foreign brokerage said on Monday.

Economists at Bank of America Securities also revised down their base case estimates on the real GDP within a week, and now expect it to contract by 4% because of a drop in economic activity.

It can be noted that multiple efforts to find a vaccine against the dreaded virus are on both globally as well domestically, but no timelines have been announced yet.

Many analysts are expecting the Indian economy to contract by 5% in FY21 as a result of the nationwide lockdowns, with some also estimating a contraction of up to 7.2% in the GDP.

“India’s real GDP will likely contract by 7.5% if the global economy has to wait for a vaccine discovery for a year,” the BofA analysts said, calling this as the “bear case”.

A base case is the most probable case or expected case. While a bear case means a typically pessimistic case.

The analysts, who were earlier estimating a 5% contraction in the worst case scenario, said every month of lockdown is costing 1 percentage point from a yearly growth perspective for the Indian economy.

In response, the Reserve Bank of India (RBI) will cut rates by another 2 percentage points in FY21, they said.

Citing movement on a proprietary indicator on economic activity, it said the indicator fell 20.6% in May after the 29.7% fall in April. Industrial production contracted by 34.7% in May, atop April’s 57.6%, it said, estimating the Q1 GDP to contract to 18%.

As the cases of COVID-19 infections have trebled since the country began getting into an unlock phase, the present restrictions will get extended to mid-September as against an earlier projection of mid-August, the economists said, adding a full restart of activities will only be possible by mid-October.

Apart from this, several states are imposing localised lockdowns like the ones across many urban centres in Maharashtra.

“As a result, we now expect FY21 GDP to contract by another 1% to 4%,” they said.

The RBI is estimated to cut rates by 0.75% more in the current fiscal as a base case, the Centre’s fiscal deficit will come at 6.85% of GDP as against the budgeted 3.5% and the overall fiscal deficit will be at 10.7%, it said.

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