Covid slump may cause 7.7% GDP contraction in FY21: First Advance Estimate

India’s economy is set for its biggest annual contraction in records going back to 1952 as the rapid spread of coronavirus cases and measures to contain them hurt businesses and households.

Gross domestic product will shrink 7.7% in the financial year ending March 2021, the statistics ministry said in its first advance estimate published on Thursday. That’s steeper than a 7.5% drop forecast by the Reserve Bank of India, as well as economists surveyed by Bloomberg and other agencies.

Agriculture is projected to grow at 3.4 per cent this financial year and manufacturing to contract 9.4 per cent. Trade, hotel, and transport in the services sector are projected to contract 21.4 per cent.

 

The projections, following a contraction of nearly 24 per cent in the April-June quarter and 7.5 per cent in the July-September quarter, reflect the slowdown effected by the coronavirus pandemic and the economic impact of months-long nationwide lockdown. The country’s GDP shrank 15.7 per cent in the first half of the year. Against this backdrop, the estimate of a GDP contraction for the full financial year comes as no surprise; it is mostly in line with those by most agencies and differs only in scale (see table).

 

While the Reserve Bank of India (RBI) has pegged 2020-21 GDP contraction at 7.5 per cent, the World Bank sees the economy shrinking by 9.6 per cent this year. In its Global Economic Prospects report, the World Bank said the informal sector, which accounts for four-fifths of employment, had been subject to severe income losses during the pandemic. "In India, the pandemic hit the economy at a time when growth was already decelerating. The output is estimated to contract by 9.6 per cent in fiscal year 2020-21, reflecting a sharp drop in household spending and private investment,” it said.

 

The First Advance Estimate is important as it would serve as a guideline for Finance Minister Nirmala Sitharaman and her team as they prepare Union Budget 2021, to be presented early next month. The NSO’s advance estimates are seen as a significant gauge for the economy: They have accurately projected the real GDP growth rate in three of the past 12 years.

"In terms of the sectoral data, our own estimates pencil in a weaker performance of construction, financial, real estate and professional services (FRP), and public administration, defence, and other services (PADOS), and a stronger performance of manufacturing, mining and quarrying, trade, hotels, transport, communication and services related to broadcasting (THTCS), compared to the Advance Estimates for FY2021," said Aditi Nayar, of ratings agency ICRA.



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