Goldman Sachs Raises India GDP Forecast For 2020-21
Goldman Sachs expects India’s GDP to shrink 10.3% in 2020-21 against a contraction of 14.8% forecast in September.
Goldman Sachs has revised India’s GDP forecast for the ongoing financial year as the global investment bank expects economic activity in Asia’s third-largest economy to normalise faster than estimated, provided an effective Covid-19 vaccine is available.
The global financial services provider expects India’s gross domestic product to contract 10.3% in 2020-21 against a contraction of 14.8% forecast in September, according to a report published on Tuesday. GDP growth is estimated at 13% in FY22 compared with 15.7% projected earlier.
“We expect that the broad-based availability of an effective vaccine in India could allow containment policies and mobility to normalise by mid-2022,” said Jonathan Sequeira and Andrew Tilton, economists at Goldman Sachs. “This should allow a meaningful activity rebound in 2021, particularly in consumer-facing services sectors, where activity remains significantly below pre-covid levels.”
The pace of rebound, however, will be restrained by some economic scarring and factors such as a weak labour market, the hit to private sector incomes and balance sheets, tighter credit supply conditions and a limited impetus from fiscal policy, the economists cautioned.
India’s fiscal deficit is estimated at 8% of the GDP in FY21 and is expected to narrow to 6.5% of the GDP in FY22, according to Goldman Sachs. The central government’s plus states’ fiscal deficit is estimated to narrow from 11.5% to 9.5% of the GDP in the same duration, the report said. “This suggests that the total fiscal policy contribution to growth will decline further in FY22.”
Inflation as measured by the Consumer Price Index is estimated at 6.2% in FY21, and is likely to decline to 4.6% in FY22 as food prices fall on easing supply restrictions, a benign monsoon, and favourable base effect, according to the report. Core inflation could also moderate given low manufacturing capacity utilisation and rupee appreciation.
As such, easing inflationary pressures should create more room for the Reserve Bank of India to lower rates. “We expect the RBI to cut policy rates by another 35 basis points early next year,” Sequeira and Tilton said in the report.