Icra projects 7.3% contraction in FY21 GDP

 

Domestic ratings agency Icra on Monday forecast a 2 per cent GDP growth in the fourth quarter of 2020-21, and a 7.3 per cent contraction for the full fiscal year.

From a GVA or gross value added perspective, the agency pegs Q4 growth at 3 per cent and the full year contraction at 6.3 per cent.

According to the agency, the 2 per cent projected GDP growth will help the economy avoid a double-dip recession as indicated by the National Statistical Office (NSO) for Q4.

Icra's projection is better than the 8 per cent contraction forecast by the NSO as it sees Q4 growth at only 1.1 per cent.

The full-year GDP is not the average of the four quarters as the weight of GDP in each quarter is different because the output in each quarter varies.

Typically, the fourth quarter each year has the highest weight in annual GDP, which is the value of all the goods and services produced in a given 12-month period in an economy.

Adding up the four quarters growth/contraction in FY21, the full-year GDP contraction stands at 8.45 per cent.

In Q1, the economy had shrunk by 23.9 per cent, which had improved to (-)7.5 per cent in Q2, while it returned to the growth territory in Q3 with a marginal 0.40 per cent expansion.

"We expect the year-on-year GVA growth at 3 per cent in Q4 of FY21 up from 1 per cent in Q3, and GDP growth in the same quarter at 2 per cent, up from 0.4 per cent in Q3, suggesting the economy is on course to avoid double-dip recession as implied by the NSO," said Aditi Nayar, the chief economist at the agency.

She sees the full-year GDP contraction at 7.3 per cent and the full-year GVA shrinkage at 6.3 per cent.

She attributes the better-than-expected numbers to the widespread recovery in volumes benefiting from the low base due to the nationwide lockdown in March 2020.

Similarly, the higher than average growth forecast for Q4 is on account of the assessed impact of the back-ended release of subsidies by the government.

She also said the improvement in the annual GVA growth in Q4 relative to Q3 will be led by industry (4.8 per cent growth from 2.7 per cent) and services at 2 per cent growth from a contraction of 1 per cent.

However, there is likely to be a deterioration in the performance of agriculture, forestry and fishing at 3 per cent from 3.9 per cent in Q3.

Benefiting from low base, manufacturing volume recorded a 12-quarter high growth of 5.8 per cent in Q4 of FY21 as against (-) 6.3 per cent in Q4 of FY20, while continuing to trail the pre-pandemic levels.

On balance, Nayar expects growth in manufacturing GVA to increase to 4 per cent in Q4 from 1.6 per cent in Q3.

Yet, the extent of recovery in the performance of informal sector remains uncertain in Q4, and she continues to caution that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors.

The expansion of government's non-interest revenue expenditure stood at a considerable 62.9 per cent in January-February of FY21, substantially higher than the 22.9 per cent annual growth in Q3.

However, other services may have remained subdued in Q4.

The agency's baseline expectation is that the GVA of public administration, defence and other services will rise 9 per cent in Q4 from (-) 1.5 per cent in Q3.