Goldman Sachs slashes India's FY21 real GDP growth forecast to 1.6%

Goldman Sachs, like most other research houses, expects a strong economic recovery in the second half of FY21
Goldman Sachs expects the global economy to sink into recession in 2020 and sees the coronavirus (Covid-19) pandemic–hit global gross domestic product (GDP) come in at a negative 1.8 per cent in 2020. The latest forecast is a 5 percentage point (pp) downward revision since early this year and around 3 pp lower than the March 22 forecast.

For India, the global research house has lowered its real GDP forecast to 1.6 per cent in financial year 2020-21 (FY21) from 3.3 per cent earlier. This, however, is still higher than United States, which it now sees contracting to -6.2 per cent in 2020 (from -3.7 per cent earlier).

“We now expect sequential real GDP growth (quarter-on-quarter seasonally adjusted and annualised rate) of -1.4 per cent in Q12020 (revised down from 3.5 per cent), -3.8 per cent in Q2 2020 (revised down from -2.0 per cent), +2 per cent, 7.5 per cent in Q3 and Q4, respectively, and further strong gains of +11 per cent in Q1-2021. This takes our FY21 GDP forecast down to 1.6 per cent on an annual-average basis," wrote Andrew Tilton, Goldman Sachs' chief Asia-Pacific economist in a co-authored report with Prachi Mishra.

Goldman Sachs, like most other research houses, expects a strong economic recovery in the second half of FY21. This, they said, is based on three assumptions. First, the three-week nationwide lockdown is expected to be removed only in a staggered fashion. As a result, social distancing measures will help reduce new infections over the next four – six weeks. While the fiscal easing so far has been limited, they do expect more fiscal measures by the central and the state governments.

“We expect the RBI to continue with its monetary easing policy, along with liquidity infusion measures. While more forceful policy support could present some upside risk, the recovery could further be delayed if the pandemic is not brought under control globally and domestically over the next few months,” Tilton and Mishra wrote.

Despite the policy support so far, and expectations of more, Goldman Sachs believes the nationwide shutdown, and rising public anxiety about the virus are likely to lead to a sharp deterioration in economic activity in March, and in the first quarter of FY21. That said, 1.6 per cent growth for FY21 would be deeper compared to widely perceived ‘recessions’ India has experienced in the 1970s, 1980s, and in 2009.

"Notably, as our global team has argued, the global COVID-19 crisis — or more precisely, the response to that crisis — represents a physical (as opposed to purely financial) constraint on economic activity that is unprecedented in post-war history.

Sector-wise assessment

Among sectors, Goldman now expects a larger hit – up to 95 per cent – on recreation and culture, and restaurant and hotels sectors (versus earlier estimates of 70-80 per cent) and increased the hit to education services up to 80 per cent (versus 60 per cent earlier).

“Overall, consumption contributes 60 per cent to Indian GDP. Our assumptions about consumption cutbacks in these categories imply a monthly hit to the level of annual GDP of around 1.2 per cent, for each month the lockdown is in place. These calculations imply a peak hit to the level of monthly GDP of 14.8 per cent, through consumption spillovers. These effects obviously appear very high; in our growth forecasts, we assume these effects to be partial, given that the enforcement of even the nationwide lockdown is not complete, and we assume a staggering exit from the lockdown,” Goldman Sachs said.

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