Indian economy to contract in FY21; lockdown compounds economic challenges, says Moody's

Moody's Investors Service on Friday said India's economy is expected to contract for the first time in more than four decades saying economic damage owing to the coronavirus-induced lockdown will be significant with lower consumption and sluggish business activity.

Even before the coronavirus outbreak, Indian economy already was growing at its slowest pace in six years and with the stimulus measures announced by the government falling short of expectations, the disruptions are likely to be greater.

"We now expect India's growth to register a real GDP contraction for the fiscal year ending in March 2021 (fiscal 2020-21), from our earlier projection of zero growth," it said in a research note.

It however expected the economy to see a recovery in fiscal 2021-22, somewhat stronger than its earlier forecast of 6.6 per cent growth.

"Economic damage as a result of India's continued coronavirus lockdown, now extended through May 31, will likely be significant and reflect the country's inherent economic vulnerabilities and fiscal constraints, with wide-ranging effects on both the public and private sectors," it said.

Prime Minister Narendra Modi imposed a nationwide lockdown to control the spread of coronavirus on March 25. It has been extended thrice, with the fourth phase set to expire on May 31.

The lockdown has presented a challenge to the country's unorganised sector, which accounts for more than half of GDP.

The first phase of lockdown largely affected low-income households and daily wage earners.

Restrictions have been eased gradually in the subsequent phases as the government attempts to restore normalcy to economic activities. In the current fourth phase, states have autonomy to decide on the delineation of areas into red, orange and green zones depending on outbreak intensity.

With India now in the fourth phase of its coronaviorius lockdown, the disruption to incomes will likely keep household consumption under pressure for the rest of the year, it said.

While the government's cumulative policy response brings total headline stimulus announcements to a sizeable Rs 20.9 lakh crore, or 10 per cent of GDP, and includes a range of support measures that will bring a degree of relief to rural households and small businesses, the measures are unlikely to offset lower consumption and sluggish business activity resulting from the extended lockdown.

"Direct fiscal stimulus spending by the government is likely to be in the range of 1-2 per cent of GDP, as most of the government's plans take the form of credit guarantees or are aimed at easing liquidity concerns for affected sectors," Moody's said. "The quantum of direct fiscal spending falls short of our expectations and is unlikely to provide much additional impetus to growth."