Indian GDP in FY21 to Contract by 5% Due to COVID-19 Recession: Crisil

India is likely to suffer from its fourth recession in the last 69 years, as the country's GDP is likely to contract by 5 per cent in FY21, credit rating agency Crisil said in a report.

The report comes days after the Reserve Bank of India (RBI) predicted that India's GDP growth for the financial year 2020-21 may remain in the negative territory.

Earlier, on April 28, it had slashed growth prediction to 1.8 per cent from 3.5 per cent.

"Things have only gone downhill since," a Crisil Research report said.

"While we expect non-agricultural GDP to contract 6 per cent, agriculture could cushion the blow by growing at 2.5 per cent."

The rating agency pointed out that in the past 69 years, India has seen a recession only thrice.

As per available data, these recessions occurred in fiscals 1958, 1966 and 1980.

"The reason was the same each time - a monsoon shock that hit agriculture, then a sizeable part of the economy," the report said.

"The recession staring at us today is different. For one, agriculture could soften the blow this time by growing near its trend rate, assuming a normal monsoon. Two, the pandemic-induced lockdowns have affected most non-agriculture sectors. And three, the global disruption has upended whatever opportunities India had on the exports front."

Besides, the report predicted that first quarter will suffer a staggering 25 per cent contraction.

"About 10 per cent of gross domestic product (GDP) in real terms could be permanently lost," the report said.

"So going back to the growth rates seen before the pandemic is unlikely in the next three fiscals."

Laying down the factors for the downward revision GDP outlook, Crisil said that latest studies by the Public Health Foundation of India and the World Health Organisation suggest the pandemic spread could peak by mid-July, implying that even if the nationwide lockdown is lifted after May 31, states with high and rising COVID-19 cases could continue with restrictions, which will be a drag on the economy.

It, however, said that on the positive side the Indian Meteorological Department expects the southwest monsoon this year to be 96-104 per cent of the long-period average, which augurs well for agriculture and crude oil prices are expected to average $30 per barrel in fiscal 2021, cushioning the economy.

Talking of the economic package recently announced by the Centre, it said that the package has some short-term measures to cushion the economy, but sets its sights majorly on reforms, most of which will have payoffs only over the medium term.

"We estimate the fiscal cost of this package at 1.2 per cent of GDP, which is lower than what we had assumed in our earlier estimate (when we foresaw a growth in GDP)," it said.

It said that successive lockdowns have a non-linear and multiplicative effect on the economy and a two-month lockdown will be more than twice as debilitating as a one-month imposition, as buffers keep eroding.

Partial relaxations continue to be a hindrance to supply chains, transportation and logistics, it said, adding that unless the entire supply chain is unlocked, the impact of improved economic activity will be subdued.

"Therefore, despite the stringency of lockdown easing a tad in the third and the fourth phases, their negative impact on GDP is expected to massively outweigh the benefits from mild fiscal support and low crude oil prices, especially in the April-June quarter. Consequently, we expect the current quarter's GDP to shrink 25 per cent year-on-year," it said.