Indian economy to contract by 7 pc in FY21: SBI Research

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Penetrating GDP growth in the third and fourth quarters, SBI Research revised its contraction forecast on Wednesday to 7% for the current fiscal year.

In 2020-21 GDP numbers, the agency had previously projected a 7.4 percent contraction. The economy contracted 15.7 percent in April-September, but the second half may see a surprise growth of 2.8 percent if the SBI analysis turns out to be right.

Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India (SBI), said of the 41 high-frequency leading indicators, 51% are showing acceleration that should help the economy turn green with 0.3 percentage point growth from the third quarter, which is likely to surprise positively when the final numbers are out.

The Indian economy contracted by a record 23.9 percent between April and June but improved significantly to -7.5 percent in the second quarter. The economy rose 4 percent in 2019-20, and it is on track to the tank by 7 percent in the current fiscal year.

With the NSO pegging it at -7 percent and RBI at -7.5 percent, the consensus is -7.5-8 percent.

We now expect the GDP decline to be around -7 percent for the full year compared to our previous estimate of?? 7.4 of a percent. In addition, Q4 growth would also be about 2.5 percent in positive territory,” Ghosh said, adding promptly that “the forecasts are conditional on the lack of any increase in infections.

“We are keeping our FY22 GDP forecast at 11 percent (RBI pegged it at 10.5 percent and the 11.5 percent economic survey and the budget did not provide a GDP estimate), but with the caveat that 11 percent will be the floor below which it can not fall,” he said.

The fact that the third quarter will be much better than the previous one is also reinforced by corporate results so far. In October-December, the corporate GVA of 1,129 companies rose by 14.7 percent, compared to 8.6 percent in the second quarter (of 3,758 companies ex- telecom)

It said that 9.5 percent could be on the higher side with respect to fiscal deficits. Except for off-balance sheet liabilities, the gross tax collection forecast for the fiscal deficit will be 8.7 percent based on revised estimates for 2020-21, and collections until December show that tax collections will decline sequentially by 8.9 percent in the March quarter. But in 2021-22, the budget estimate of Rs 22.17 lakh crore, or 9.9 percent of GDP, will top the collection.

Meanwhile, as of February 8, the Centre’s cash balances have decreased from the Rs 3.4 lakh crore high to about Rs 2.3 lakh crore.

Given that 85-90 percent of such cash balances belonged to states that were invested with the Centre, it is likely that states will prefer to spend the cash rather than conserve it before closing the 2020-21 accounts.