Indian economy to contract 5-7% in FY21: Bernstein, Goldman Sachs

Analysts say the Rs 20-trn stimulus package by govt a lost opportunity

Bernstein, the US-based investment management firm, has estimated contraction in the Indian economy at 7 per cent during 2020-21, while Goldman Sachs projected it to be 5 per cent.

The forecasts came even as the government announced a stimulus package, spread over five days, last week.

While Bernstein, which has nearly $623 billion in assets under management globally, kept its projections unchanged after the stimulus, Goldman Sachs now expects a bigger contraction than its earlier estimate of 0.4 per cent. Nomura retained its projection of 5 per cent contraction in FY21 despite the stimulus.

BofA Securities pegged it at 0.1 per cent for FY21 and 12 per cent in the first quarter of the fiscal year. CARE Ratings has projected growth of 1.1-1.2 per cent.

However, its chief economist, Madan Sabnavis, said the forecast would be lowered and the economy was likely to see a fall in GDP. ICRA stuck to its projection of 1-2 per cent contraction. Its principal economist, Aditi Nayar, said the support provided by the government would be offset by a longer lockdown. The government has extended the lockdown by a further two weeks to May 31 with some relaxation.

The stimulus package of the government is a lost opportunity, said analysts at Bernstein. The desire to show the world that they care about the economy and are willing to match global stimulus numbers was perhaps the driver behind the claim of a large package, Bernstein said.

“While the package started on important aspects, the need to announce measures that add up to this top down number made the entire package aimless, with several generic announcements which should ideally have been a part of a normal economic agenda. Overall, we see it as a lost opportunity,” wrote Venugopal Garre, Ankit Agrawal and Ranjeet Jaiswal of Bernstein in the report.

India, they said, does not have fiscal buffers and hence a large fiscal stimulus would have been a bold bet. That could have impacted ratings and currency if not executed properly. The government, Bernstein believes, has hence taken an easier path. Over the past few days, the government has sought to alleviate economy-related issues triggered by the rampant spread of Covid-19.

While guarantees for fresh credit to micro small, and medium enterprises (MSMEs), supporting the poor and migrants via an expanded employment guarantee programme, and the provision of food for the poor and migrants got a thumbs-up from Bernstein, it cautioned that the expansion of the Mahatma Gandhi National Rural Employment Guarantee Scheme could impact labour availability, as rural migrants may not rush back for jobs. As a result, construction and transport will be affected the most.

“The focus should have been on urban, corporates, consumption, infra and impacted sectors, but it was on rural and strange-end markets such as space program. Rural is in control, as farm incomes are protected (good harvest season and good start to summer crop sowing). Yet, several measures (in the form of loans) were announced for agri, some of which are already existing programmes,” analysts at Bernstein wrote.

The overall plan, in their view, was a general economic agenda and lacked substantive decisions to support consumption and promote manufacturing. “Even the broader reforms lacked the spark while urban and corporates (irrespective of impacts) were ignored. We believe that equity markets are likely to be less enthused, with the package, as it is less likely to support the economy in the near/medium term,” Bernstein analysts said.

Andrew Tilton, Goldman Sachs’ chief Asia-Pacific economist, in a co-authored note with Prachi Mishra, said: “There have been a series of structural reform announcements across several sectors over the past few days. These reforms are more medium-term in nature, and we therefore do not expect these to have an immediate impact on reviving growth.”

The financial services firm estimated the fall in GDP to 45 per cent in the first quarter of the current financial year over the fourth quarter of the previous financial year (annualised) compared to a 20 per cent decline projected earlier.

However, it expects a sharper rebound in the second quarter of FY21 than forecast earlier. It pegged GDP growth in the quarter at 20 per cent over the previous quarter (annualised) compared to the earlier projection of 10 per cent.  For the next two quarters, the estimates remained unchanged at 14 per cent (Q3) and 6.5 per cent (Q4).

Nomura said the government would need to step in again in the coming quarters for reviving growth through a demand stimulus, as well as measures to support the financial sector.  It said of the 10 per cent of GDP package announced, the bulk of the support emanates from higher contingent liabilities (guarantees) at 2.15 per cent of GDP, while the net cash outgo from the central government’s budget (aggregating the fiscal impact of all packages) amounts to only 0.8 per cent of GDP.