Economy may contract by over 40% in Q1: SBI Research

SBI Research estimates the economy will contract by 6.8 per cent in FY21.

New Delhi: The Indian economy faces a 'humongous' loss in the June quarter and gross domestic product (GDP) could contract by more than 40% during the period, State Bank of India (SBI) Research said in a note. It expects another stimulus package later in the year to help shore up the economy. SBI Research estimates the economy will contract by 6.8% in FY21 after a 'smart recovery' in the second quarter and “much better” growth numbers in the third and fourth quarters. “We now believe Q1GDP FY21 loss will be humongous and could even exceed 40%,” it said on Tuesday, estimating second-quarter growth at 7.1% if demand recovers.

The first quarter will suffer a contraction of 25%, ratings agency Crisil said in a note on Tuesday, predicting India’s worst-ever recession. It sees GDP contracting 5% in FY21. International rating agency Fitch also downgraded India’s growth forecast. “Biggest forecast cut was to India where we now anticipate a 5% decline in the current financial year in contrast to an earlier forecast of growth of 0.8%,” the agency said in a statement late Tuesday. SBI Research expects Covid-19 infections to peak in the last week of June. “The good news is that Q2GDP growth in FY21could see a bump up because of a significant contraction in Q1GDP,” said SBI group chief economic adviser Soumya Kanti Ghosh.

However, he said that such a second-quarter bump due to pent-up demand can “rapidly degenerate in a low equilibrium with income and job losses acting as a drag on consumption”. “We thus believe the government might be looking at the data more closely to prevent such loss in momentum in Q3 and Q4 and even come up with another targeted package later in the year,”SBI Research said. The government has announced a Rs 20 lakh crore revival package for the economy but some experts have said the fiscal stimulus is only about Rs 2 lakh crore, or 1% of GDP. SBI Research has taken a bottom-up approach toward estimating GDP, reasoning states are now restarting economic activities in a staggered manner. It estimated the total loss to states due to Covid-19 at Rs 30.03 lakh crore, of which 90% was accounted for by red and orange zones, which mainly included urban areas.

On the state losses, it said the top 10 contributed to 75% of the total, with Maharashtra’s share at 15.6%, followed by Tamil Nadu at 9.4% and Gujarat at 8.6%. These states also had the highest number of Covid-19 cases. Infection numbers should drop after they peak in late June, it said. “We believe that new cases are likely to peak somewhere anytime in the last week of June, beginning June 20,” SBI Research said. “Following that the new cases are expected to witness steep fall till the beginning of August after which it is expected to flatten by mid-September.”