Nomura Expects India GDP To Contract 10.8% In 2020-21
“Some sectors may plateau much before they reach their pre-pandemic levels,” Nomura’s Sonal Varma says.
A visible collapse in domestic consumption, which led to the steepest decline in gross domestic product in the quarter ended June, prompted Nomura to downgrade India's economic outlook for the ongoing financial year.
The research firm now expects the Indian economy to contract 10.8% year-on-year compared with a 6.1% contraction forecast earlier.
India's GDP contracted 24% year-on-year in the April-June period as the lockdown to contain the coronavirus pandemic stalled activities in April and most of May before the nation started easing curbs. Nomura was joined by Credit Suisse, Kotak Institutional Equities and Deutsche Bank, among others, in a downgrade of growth outlook.
Economic data points to an uneven recovery as of July, with a faster rise in supply compared to demand, rural consumption versus urban consumption, and industrial sector versus the services sector, Sonal Varma, chief India economist at Nomura, told BloombergQuint in an interview.
Supply-side indicators have recovered to roughly 82% of the pre-pandemic levels in July, whereas the demand side has recovered about 67%, Varma said. While rural consumption was better than urban, it was not as strong as was earlier contemplated.
Varma expects the baton of consumption recovery to be passed on to the durables segment, led by pent-up demand. "Since the virus cases are moving from the urban areas to the semi-urban and rural areas, and we know that 7% of rural income comes from non-agricultural activity, it is possible that we might see some slowdown in rural demand in the second half of the year," she said.
Services sector indicators, on the other hand, are "languishing at 25-30% of the pre-covid levels and the worry is that if you don't get the virus in check, activity will remain at this level for a very long time", Varma said. The subdued income and job prospects are also likely to play out in some form, she said, justifying the downward revision in GDP outlook.
Even the sequential pace of normalisation is moderating, suggesting that some sectors may plateau much before they reach their pre-pandemic levels, Varma had said in a report published by Nomura.
Need For Fiscal Stimulus
Despite a sharp rise in government spending during the quarter, a collapse in private consumption led to a deeper-than-expected contraction in the country’s economic activity. This, according to Varma, highlights the need for a fiscal stimulus.
The latest GDP data, Nomura said, should “clear the air” for policymakers to reassess their strategies and act as a basis for the next policy stimulus. The lack of it may lead to a longer period of below-normal activity which risks knock-on effects on the labour market, small and medium enterprises, and ultimately on the banking system, the report said.
“We expect fiscal-monetary policy coordination going ahead, as the RBI endeavours to keep long-term government bond yields low, to ensure smooth financing of higher fiscal deficits,” Nomura said. “Secondary market government bond purchase is likely to be the first line of defence, but we cannot rule out debt monetisation.”
Fiscal deficit, subsequently, is likely to rise to around 7.8% of GDP for FY21, it said.