Economy will shrink 5% in FY21, stimulus not enough: S&P

S&P Global Ratings on 8 June said the Indian economy would shrink 5% in the current fiscal. It said the fiscal stimulus worth 1.2% of GDP — Prime Minister Narendra Modi’s Rs 20 lakh crore plus package announced on 12 May that Finance Minister Nirmala Sitharaman broke up into five presentations over as many days — would not be enough to provide significant growth support.

Indian banks’ loan growth will slow to nil to 1% in the year started April 1, according to the Indian unit of S&P Global Ratings. That’s lower than 6.1% of the previous fiscal year, which was already a multi-decade low.

Corporate borrowings, accounting for half of total credit, will see the worst slump. Loans to individuals will decelerate to “low single digits” from “mid teens” in the past few years, Crisil Ltd. said in a report on 8 June.

Bogged down by the worst bad-loan ratio in the world, Indian banks have turned risk-averse as the strict shelter-at-home rules have shuttered businesses and left millions jobless.

Prime Minister Narendra Modi is counting on fresh credit to spur an economy hurtling toward a rare contraction. “This crisis is unprecedented and so will its economic fallout be,” said Crisil’s Senior Director Krishnan Sitaraman.

S&P said, in a report on emerging markets titled ‘Financial Conditions Reflect Optimism, Lockdown Fatigue Emerges’, the services sector, which comprises large employers, has been severely affected, leading to widespread job losses. “Migrant workers have been geographically displaced, and we expect it will take some time to unwind this process. There will be supply chain disruptions over the transition period,” S&P said.

The rating agency forecast the Indian economy to shrink by 5% in the current fiscal and said growth will rebound to 8.5% in 2021-22. It projected growth to be 6.5% in 2022-23. India’s GDP growth had slumped to an 11-year low of 4.2% in 2019-20.

“The central bank has cut policy rates by 115 basis points since February, but policy traction remains low as banks remain unwilling to lend. New direct fiscal stimulus worth 1.2% of GDP won’t be enough to provide significant growth support,” S&P said.

Rating agencies Fitch and Crisil had predicted a 5% contraction of the Indian economy too. Moody’s forecast economy to shrink by 4%. World Bank estimates the Indian economy to contract 3.2% in 2020-21.

The government had last month announced a Rs 20.97 lakh crore economic package, which includes liquidity support from the Reserve Bank of India (RBI).

S&P had earlier said that the government’s stimulus package, with a headline amount of 10% of GDP, has about 1.2% of direct stimulus measures, which is low relative to countries with similar economic impacts from the pandemic. The remaining 8.8% of the package includes liquidity support measures and credit guarantees that will not directly support growth.