India’s real gross domestic product (GDP) in FY21 could be 7.7% lower than in FY20 and 3.9% lower than even the FY19 level in absolute term, the National Statistical Office (NSO) forecast on Thursday, releasing the advance estimate for the benefit of the formulation of the Central Budget, due on February 1.
The pulldown impact of net exports, which benefited from a Covid-induced demand-compression in the economy in the first half of this fiscal, exacerbated again in Q3, as imports rebounded.
India’s real gross domestic product (GDP) in FY21 could be 7.7% lower than in FY20 and 3.9% lower than even the FY19 level in absolute term, the National Statistical Office (NSO) forecast on Thursday, releasing the advance estimate for the benefit of the formulation of the Central Budget, due on February 1. The sharpest annual GDP contraction in recorded history was caused by the Covid-19 pandemic spanning through the year, though a slowing phase had began a few quarters earlier. The contraction estimated by the NSO is, however, narrower than prognosticated by various other agencies including the IMF (10.3%), World Bank (9.6%) and other prominent global rating agencies, but a bit worse than RBI’s latest forecast of 7.5%.
Given that the economy shrank by 15.7% in the first half, the NSO’s estimate of contraction for the second half is merely 0.1%, implying a resilient recovery. Nominal GDP, against which the key budget numbers are benchmarked, is estimated to contract by 4.2% in the current fiscal. This means as against the level of rs 224.89 lakh crore envisaged when the FY21 Budget was prepared, the year’s nominal GDP will be Rs 194.82 lakh crore, down 13.4%. So, even if the fiscal deficit in absolute term remains the same as the budgeted Rs 7.96 lakh crore, when expressed as a fraction of GDP, it will be wider at 4.1%, against 3.5% budgeted.
With a big shortfall in tax revenue and other non-debt receipts, and the likelihood of expenditure being at nearly the same level budgeted, the fiscal deficit is widely expected to be substantially higher than the budgeted level. If the deficit doubles, it will be 8.2% of the GDP, requiring a major revision of the fiscal consolidation road map, along with FY22 Budget.
Analysts expect the fiscal deficit to remain at a very elevated level in FY22, too, as the government is bound to pump-prime the economy, with its budgetary as well as other public expenditures. Coupled with state governments’ combined fiscal deficit and off-budget spending by the Centre, the consolidated fiscal deficit in FY21 will be even around 20% of GDP, analysts reckon.
DK Srivastava, chief policy adviser at EY India, said: “We assess that the government may revise upwards, its borrowing target so as to exceed 7% of 2020-21 nominal GDP and signal a move towards restoring fiscal consolidation in a limited way in the budget estimates for 2021-22.” India’s real GDP shrank at 7.5% in September quarter, a contraction much narrower than feared by many. The economy contracted at a record 23.9% in the first quarter of the fiscal. A contraction in nominal GDP narrowed sharply to 4% in the September quarter from a record 22.6% in the previous three months.
Despite a projected slowdown in the farm sector growth to 3.4% in FY21 from 4% a year earlier, agriculture remains the bright spot in the economy. A healthy year-on-year growth of 2.9% in rabi sowing and reservoirs’ storage at 122% of decadal average brighten the farm sector prospects. While the economy did not receive much government spending support in Q2 – government consumption expenditure declined 22% on year in the quarter–, the NSO expects government spending to pick up in H2, to raise the share of government final consumption expenditure in GDP from 11.3% in FY20 to 13% in FY21. This is even as the other two chief pillars of the economy – consumption and fixed capital formation – are seen losing their shares in GDP.
The Controller General of Accounts said recently that the Centre’s budget spending in November shot up by 48.3% on year, having improved from a 9.5% rise in the previous month and a 26% decline in September. The Central PSEs and other leading public sector undertakings under the Centre’s fold are largely sticking to the targeted capex plans, while revenue-constrained state governments have slowed capital spending.
The pulldown impact of net exports, which benefited from a Covid-induced demand-compression in the economy in the first half of this fiscal, exacerbated again in Q3, as imports rebounded. The share of exports in GDP (in real term) is expected to drop marginally from 19.3% in FY20 to 19.2% this fiscal. Reacting to the GDP data, the finance ministry said the movement of various high frequency indicators in recent months points towards “broad based nature of resurgence of economic activity”. The relatively more manageable pandemic situation in the country as compared to advanced nations has further added momentum to the economic recovery,” it said.
While the government is confident of a resurgence in the second half, several indicators—from industrial production, manufacturing and services PMI, auto sales, railway freight and power demand to exports and core infrastructure sector growth—have exhibited mixed trends in the third quarter. Private consumption expenditure is estimated to shrink 9.5% on year in FY21, while gross fixed capital formation could drop by 2.8%. Aditi Nayar, principal economist at Icra, said: “While the advance estimates of GDP for FY21 have been based on data that is available for only the first six to eight months, the modifications made in the extrapolation process seem to have captured the impending upturn expected in the remainder of this extremely tumultuous year.”