India to see negative growth, says FICCI survey

New Delhi (NVI): India’s annual median growth in the current financial year could dip to (-) 4.5 per cent, according to FICCI’s Economic Outlook Survey, which says the COVID-19 pandemic has severely hit the economy that was already witnessing a slowdown.

The minimum and maximum growth estimate stood at (-) 6.4% and 1.5%, respectively, for 2020-21, it said.

The quarterly median forecasts indicate GDP to contract by (-) 14.2% in the first quarter of 2020-21, said the survey conducted in the month of June and drawing responses from leading economists representing industry, banking and financial services sector, according to a press release issued by the industry body FICCI.

The official growth numbers for the first quarter are expected to be released by the end of August 2020.

“There were already signs of an impending slowdown in the economy, which have been sharply accentuated by the COVID-19 pandemic induced lockdown. The spread of COVID-19 pandemic has severely hit global as well as domestic growth,” it said.

Agriculture seems to be the only sector with a silver lining right now.  There is an apparent upside as far as the performance of monsoon is concerned this year and the water reservoir levels in the country stand at good levels.

Economic activity wise annual forecast indicated a median growth of 2.7% for agriculture and allied activities for 2020-21, the FICCI said.

The rural sector supported by a steady agriculture performance and hopefully a contained number of COVID-19 cases will be a key demand generator for India this year. Further, the direct income support through PM-KISAN and increased allocation to MGNREGA is helping the returnee migrants – lending support to the rural economy, it added.

Besides, there has been a significant focus in the economic package on the agriculture sector and the focus has clearly been on bridging the existing gaps while creating the potential for new opportunities.

Industry and services sector, on the other hand, are expected to contract by 11.4% and 2.8%, respectively in 2020-21, it said, adding weak demand and subdued capacity utilization rates were already manifesting into a drag on investments and the Covid-19 pandemic has further extended the timeline for recovery.

Even though activity in sectors like consumer durables, FMCG etc. is gaining traction, majority of the companies are still operating at low capacity utilization rates. Labour availability and feeble demand remain as major issues for the companies.

Therefore, fresh investments will be difficult to come by in the near to medium term. Also, a significant change in consumption patterns is expected on back of uncertainty with regard to jobs and income losses. Expenditure on non-essential goods is likely to remain under check for some time. In fact, the share of private final consumption expenditure in GDP has already reported a decline from 59.9% in Q3 FY20 to 55.9% in Q4 FY20, it said.

Absence of demand stimulus, a second wave of the pandemic and continuation of social distancing and quarantine measures will weigh heavy on growth prospects. With demand and investment outlook muted, robust government expenditure has been the only saviour. Nonetheless, growth is likely to bottom out post the second quarter of current fiscal year.

Some of the stimulus measures are reaching to the ground – especially through the credit guarantee scheme for MSMEs and support through MGNREGA – which is positive.

In addition to the forecast of key macro variables, economists were asked to share their views on certain contemporary subjects as well.

Economists were asked to share their views on the fiscal stimulus package 2.0 and any additional measures that can be undertaken. Participants were of the view that government measures in Stimulus 2.0 focussed broadly on saving lives and on undertaking deep structural reforms, the FICCI release said.

They, therefore, felt that while the quasi fiscal measures and structural reforms announced were undoubtedly steps in the right direction, on ground implementation and results will take a long time to work through in the present environment.

A majority of economists believed that the government could have undertaken a more aggressive fiscal stance than what has been announced in the two packages combined.

Participating economists highlighted that the measures announced by both RBI and the government focussed largely on addressing supply side constraints with limited support for creation of demand.

They strongly felt that there is a need to provide more measures to boost demand conditions in the economy. Reviving demand in the economy currently holds greater importance not only because India is broadly a consumption driven economy but also because investments driven growth is unlikely to gather momentum despite all the right measures as corporate India is reeling with excess idle capacity.

Apart from pure cash transfers, the government could also consider GST rate reductions especially in the non-essential goods segment which has the potential to drive demand. Furthermore, some sort of tax waivers could also be undertaken for low income groups. Alongside, sector specific measures could also support recovery in a big way.

Sectors with high backward and forward linkages such as automobile, construction, housing etc. could be revived without incurring fiscal strain. Steps such as announcing of vehicle scrappage policy coupled with cash rebates which could be funded by additional GST revenue flowing from higher production, providing sovereign guarantee on incomplete housing projects should be considered.