S&P: Indian Economy Likely to Contract by 5 Percent

Published June 28th, 2020 - 07:00 GMT
S&P: Indian Economy Likely to Contract by 5 Percent
Fitch Ratings has said after a contraction in the current financial year, India's economy is on track to bounce back with a sharp growth rate of 9.5 percent next year provided it avoids further deterioration in financial sector health. (Shutterstock)
Highlights
The IMF has predicted contraction of 4.5 per cent in 2020. It also expects global output to shrink 4.9 per cent this year, a sharper fall than the three per cent contraction predicted in April.

The fallout of the Covid-19 pandemic on the Indian economy will be more disastrous than estimated earlier, according to international financial institutions and economists.

The latest institution to sound the alarm bells for Asia's third-largest economy is the S&P Global Ratings that said on Friday that the Indian economy is in deep trouble with growth likely to contract by five percent this financial year.

"India's economy is in deep trouble. Difficulties in containing the virus, an anemic policy response, and underlying vulnerabilities, especially across the financial sector, are leading us to expect growth to fall by five percent this fiscal year before rebounding in 2021," S&P said in an update.

In the same lines, Fitch Ratings has said after a contraction in the current financial year, India's economy is on track to bounce back with a sharp growth rate of 9.5 percent next year provided it avoids further deterioration in financial sector health. The coronavirus pandemic will lead to shrinking of the already slowing economy in 2020-21 that started in April. Fitch Ratings also forecast a five percent contraction in the GDP in the ongoing financial year.

S&P's forecast is gloomier than IMF Chief Economist Gita Gopinath's view that the economic downturn is "incredibly deep this year," and that India will grow in 2021 at slightly over one percent over 2020 as the coronavirus pandemic has caused wider and deeper damage to economic activity than first thought.

The IMF has predicted contraction of 4.5 per cent in 2020. It also expects global output to shrink 4.9 per cent this year, a sharper fall than the three per cent contraction predicted in April.

Gopinath said India needs "to expand its testing capacity, some more budget spending would also help which is more direct cash and in-kind support for vulnerable people and also SMEs, and the third is to recognise that this is an opportunity to strengthen reforms."

The IMF views the current recession as the worst since the 1930s Great Depression, which saw global GDP shrink 10 per cent, but Gopinath has said that the $10 trillion in fiscal support and massive easing by central banks had so far prevented large-scale bankruptcies.

S&P, in its report titled "Asia-Pacific losses near $3 trillion as balance sheet recession looms", projected the region's economy to shrink by 1.3 per cent in 2020, but grow by 6.9 per cent in 2021 with a loss of $3 trillion output over these two years.

"Asia-Pacific has shown some success in containing Covid-19 and, by and large, responded with effective macroeconomic policies," said Shaun Roache, chief economist for Asia-Pacific at S& P Global Ratings.


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