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Minus Nine Now: Changes Since Our May Forecast


Adverse Factors: unfettered spread of pandemic, no further fiscal stimulus, inflation constrains monetary policy.

Swing Factor: favourable monsoon, but harvest on watch.

Changes Since Our May Forecast

Official data has confirmed our worst fears: a 61-day complete nationwide lockdown, followed by an ‘unlock’ phase with off-again, on-again regional lockdowns, and curbs, and a convulsing global economy, sent India’s real GDP on its worst-ever recorded contraction of 23.9% for the quarter.

Worse still, India fell hardest among peers.

That said, the extent of contraction was not entirely unexpected – CRISIL had predicted the economy would slump 25% in the first quarter, the stringency of the lockdown and high-frequency data also pointing to a deep hit.

Moreover, other factors in the making since May lead us to believe that revival has been pushed further. We forecast a further downward revision in GDP growth outlook for fiscal 2021 to -9% from -5% forecast in May, based on the following:

Adverse Factors

Unfettered spread of pandemic: The number of confirmed Covid-19 cases in India had crossed 42 lakh as on September 7. In the last week of August, India reported ~5 lakh new cases and the highest numbers of new cases globally. India is now the top contributor to daily increment in new cases. The caseload remains concentrated in states which have a major share in India’s GDP: Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh together account for ~54% of India’s total confirmed cases and ~36% of India’s GDP. An additional worry is the locus of the pandemic shifting from metropolitans to smaller cities. With a steep rise in cases, localized lockdowns and restrictions have continued, hampering economic activity even in the second quarter. High-frequency data shows a wobbly recovery and economic activity at subnormal levels in July and August

No further fiscal stimulus: A stretched fiscal position has constrained the government from spending more to support the economy. While the government did announce a series of measures in the wake of pandemic that provided some support to the rural economy, the overall direct fiscal stimulus was low at about 1.2% of GDP2. Till date, the policy push to growth remains muted, except in pockets. Our May forecast had assumed additional direct fiscal support of 1% of GDP, which has not come through

Inflation constrains monetary policy:With retail inflation refusing to climb down below the acceptable upper limit of 6% for two quarters, the RBI had little choice but to pause its rate-cutting spree in the August monetary policy meet. The central bank is likely to hold policy rates till there are signs of inflation cooling – limiting the use of policy rate cuts to support growth for now

Swing Factor

Favourable monsoon, but harvest on watch: Normal rains, in line with the Indian Meteorological Department’s (IMD) forecast, have been a supportive factor this year. Rains have not only been timely, but also well-spread, hastening sowing activity in large parts of the country. CRISIL Research estimates that kharif output could be 5-6% higher on year, on the heels of a bumper rabi harvest. But the recent spread of Covid-19 cases to rural areas and the possibility of a rising curve, hovers like a dark cloud over the harvest and marketing period (starting in October.