The full realisation of the stimulus package announced by the government could significantly stem the decline in gross domestic product (GDP), with the Indian economy growing at 1.3% in FY21 as a base case scenario, the National Council of Applied Economic Research (NCAER) said on Thursday.
Last month, the New Delhi-based economic think tank had said that the economy could contract by 12.5% during the same period in the absence of a government stimulus.
In the base case, NCAER incorporated the monetary and fiscal stimulus measures undertaken by the Reserve Bank of India (RBI) and the central government, including the additional government borrowing of ₹4.2 trillion for the current fiscal year. The base case also incorporates additional borrowing headroom of up to 2% of GDP provided to states. The contingent liabilities arising out of government credit guarantees for lending to micro, small and medium enterprises (MSMEs) were also reflected in the public debt component.
However, NCAER also came up with alternative scenarios, in which the economy could contract by 10% of GDP or record zero growth, considering varied supply constraints.
“We examine a base scenario where the stimulus measures are allowed to work themselves out without any supply constraint, resulting in positive growth of 1.3%. However, the ground reality is that the economy is subject to very severe supply constraints because of the increased mortality of businesses, especially MSMEs, the reverse migration of migrant labour and large scale disruption of supply chains,” it said.
NCAER’s projection comes a day after the International Monetary Fund reversed its optimism for India, forecasting India’s GDP to contract by 4.5% in FY21, against its earlier estimate of 1.9% growth.
For the June quarter, NCAER has estimated gross value added (GVA) to decline by as much as 25.7%.
“Negative growth is expected to continue for the next two quarters as well, though with a gradual reduction in the decline relative output in the corresponding period last year as the lockdown is withdrawn and supply response picks up. This gradual revival is likely to lead finally to a moderate positive growth of 0.5% in the fourth quarter of 2020-21. This would mainly reflect the effect of a low base in Q4 of 2019-20, when GVA growth declined to 3.1%,” it said.
There were disruptions in the agricultural sector in the first phase of the covid-19 lockdown, but there has been a gradual return to normal since mid-April, the report said. “In both the horticulture and dairy sector the expectation is that output will be normal. Our assessment is that GVA in agriculture will grow at 3% in 2020-21,” it said.
Industrial GVA will decline by 54.2% in the June quarter before gradually recovering to 0% growth by the fourth quarter, implying an annual contraction of 27.1% in 2020-21, the report said. The services sector is estimated to decline by 16% in the June quarter and is likely to register negative growth for the whole year. “Of its three sub-sectors, ‘trade, hotels, transport, communication and broadcasting’ would suffer maximum disruptions. However, within this sub-sector communications is likely to register high growth because of the increased use of e-communications for both professional and social purposes,” it said.