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Indian economy to contract in FY21, says Moody's

Moody’s latest update is in line with most global agencies in forecasting a negative outlook this fiscal.

, ET Bureau|
Last Updated: May 22, 2020, 11.23 PM IST
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NEW DELHI: Moody’s Investor Service projected the Indian economy to contract in the current fiscal, downgrading its May 8 update which estimated 0% growth in FY21.

The fiscal measures announced by the government were unlikely to offset lower consumption and sluggish business activity resulting from the extended lockdown, said the report released on Friday.

“We expect the economic fallout from the coronavirus outbreak to weigh on already fragile household consumption which, coupled with sluggish business activity, will result in a sharp decline in India’s economic growth in fiscal 2020-21,” said Deborah Tan, a Moody’s Assistant Vice President.

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However, it did not take into account the additional monetary measures announced by the Reserve Bank of India on Friday.

The global ratings agency also expected a stronger rebound in the next fiscal compared to its earlier estimate of 6.6%, on the basis of a favourable base effect.

While avoiding an exact figure, Moody’s latest update is in line with most global agencies in forecasting a negative outlook this fiscal after the announcement of the Atmanirbhar Bharat package. While Bernstein expected -7% growth, both Goldman Sachs and Nomura saw a 5% contraction in the Indian economy

On the stimulus package, the report said, “While the impact of the policy reforms will likely materialize over the medium term, they are unlikely to shore up short-term growth,” adding its direct fiscal impact would be 1%-2% of GDP and would provide limited impetus to economic growth.

Yet, this would further strain the fiscal deficit as weaker overall revenue and disinvestment receipts combined with lower rates of nominal GDP growth would contribute to a higher future debt burden in debt-to-GDP terms, the report said.

Additionally, Moody’s said the loan guarantee scheme for working capital loans to micro, small and medium enterprises would not be sufficient to fully shield the sector from the effects of the economic shock as they were already under financial strain before the Covid-19 crisis.

The report also said the other liquidity easing measures such as the extended Partial Credit Guarantee Scheme (PCGS 2.0) would not alleviate the pervasive risk aversion in the financial sector. “Overall, we do not expect the latest government measures to reduce risk aversion among banks and capital markets toward finance companies,” it said.

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