Moneycontrol PRO
Check Credit Score
Check Credit Score
HomeNewsBusinessEconomy

India's GDP to contract by 3% in FY21: Bank of America

BofA Securities also said the RBI will monetise the fiscal deficit through purchase of government bonds of up to $95 billion through open market operations, and its revaluation reserves of $127 billion may also be used to recapitalise state-run banks.

July 09, 2020 / 04:15 PM IST

India's GDP will contract by 3 percent in FY21 because of the coronavirus pandemic, assuming the economy is opened up fully from next month, a foreign brokerage said on Thursday.

BofA Securities also said the RBI will monetise the fiscal deficit through purchase of government bonds of up to $95 billion through open market operations, and its revaluation reserves of $127 billion may also be used to recapitalise state-run banks.

Economists have been sharply cutting their growth forecasts for FY21 because of the impact of the pandemic and all watchers, including the RBI, now believe the Indian GDP will contract this fiscal, with some estimates ranging up to 7 percent negative growth.

BofA Securities' base case estimate is for 3 percent contraction with the assumption of the economy opening up fully from mid-August, which may go up to 5 percent if the crisis prolongs.

Its India economist Indranil Sen Gupta told reporters that his estimate is among the more optimistic ones and differs from others on the likelihood of the COVID-19 impact, which he said is a health emergency which no one can predict with certainty at present.

COVID-19 Vaccine

Frequently Asked Questions

View more
How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

View more
Show

He said the strict lockdown in April and May had a 3 percentage points impact on the annual GDP, and subsequently with the limited opening up, the monthly impact has gone down to 1 percentage point per month.

India's GDP growth decelerated to 4.2 percent in 2019-20, the weakest in over a decade. Gupta said the growth potential is over 7 percent.

GDP growth will come in at 9 percent in FY22 on the lower base, he said, adding that for two fiscal years (FY21 and 22), the growth will come at an average of 3 percent, which would mean that the COVID-19 pandemic has set Indian economy back by a year.

The biggest strength for India at present is the over $500 billion in forex reserves which have been accumulated by the RBI over some months, and it is due to this kitty that the country is not being bracketed with other emerging economies by the markets at present, he said.

The rural sector also is a relatively bright spot because of better monsoons which will deliver a normal harvest for the summer crop and also the lesser instances of COVID-19 infections, he said, estimating the agriculture, forestry and fishing sector to clock 3.5 percent growth.

However, on the flip side, India has a large population, limited healthcare infrastructure and has opened up the economy when the infection curve was rising, leading to tripling of cases in a month, he said, calling this as the biggest weakness at present.

The RBI will cut rates by 0.50 percent by October in the base case, and if the economy contracts by a higher level of 5 percent, the cuts will total up to 1.50 percent more by December, he said.

However, the rise in the real rate of interest because of stiffness in the wholesale price inflation is a matter of concern, he said, adding that this needs attention.

Indian banks need over $7 billion in recapitalisation support, which will make sure that they continue to lend, he said, adding that bankers should desist from shying away from lending due to concerns of NPAs in future.

Given the difficulties in arranging the finance, the government can look at RBI's revaluation reserves to be deployed into bank recapitalisation.

Asked if such a contentious step will be considered, he said this is the best option given the circumstances as it does not put any pressure on the fiscal situation.

Follow our full coverage of the coronavirus pandemic here.

PTI
first published: Jul 9, 2020 04:10 pm

Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!

Advisory Alert: It has come to our attention that certain individuals are representing themselves as affiliates of Moneycontrol and soliciting funds on the false promise of assured returns on their investments. We wish to reiterate that Moneycontrol does not solicit funds from investors and neither does it promise any assured returns. In case you are approached by anyone making such claims, please write to us at grievanceofficer@nw18.com or call on 02268882347