Asia Economy

Goldman Sachs gives India's growth forecast a 'gigantic downgrade'

Key Points
  • Goldman Sachs revised its growth forecast for India and said the economy is expected to contract by 5% for the fiscal year that began in April and ends in March 2021. 
  • Prachi Mishra, chief India economist at the investment bank, said two reasons factored in the forecast revision: the poor set of economic data released in March and April as well as the extended nationwide lockdown that is expected at least until end of May. 
Goldman Sachs predicts 5% contraction in India's growth for current fiscal year
Goldman Sachs predicts 5% contraction in India's growth for current fiscal year

The extended period of lockdown in India due to the coronavirus outbreak is set to take a toll on the country's growth outlook, according to investment bank Goldman Sachs. 

The bank revised its growth prediction this week for the full fiscal year in India that began in April and will end in March 2021. Gross domestic product is expected to contract by 5% for the year, worsening from the bank's earlier prediction of a negative 0.4% growth. 

"This is a really gigantic downgrade," Prachi Mishra, chief India economist at Goldman Sachs, told CNBC's "Street Signs" on Friday. "A forecast of minus 5% for the year as a whole would be as deep as compared to the deepest recession India has witnessed since 1979." 

India's first-quarter GDP data is expected next week and the outlook remains bleak among economists.

The South Asian country was already facing an economic slowdown before the virus outbreak pushed the government to impose a nationwide lockdown that began in late March and has subsequently been extended multiple times at least until the end of May. Economic activity grounded to a halt as a result, affecting millions of small businesses as well as large corporations, while millions of people lost their jobs. 

India now has over 118,000 cases of infections and more than 3,500 people have died, according to the health ministry. 

Migrant workers who gathered at Mini Secretariat after learning that the administration was preparing to send migrant workers back to their home states, on May 2, 2020 in Gurugram, India.
Parveen Kumar | Hindustan Times | Getty Images

Goldman's Mishra said the economic impact in the three months between April to June is expected to be severe. Goldman Sachs predicted a massive 45% decline from the previous quarter in annualized terms, compared to an earlier forecast of negative 20% growth. 

"This is really due to two reasons: One is the extremely poor economic data in March and April," Mishra said. "The second reason for this deeper trough is that we are incorporating the effects of the lockdown extension." 

India's services activity collapsed last month, according to a study. April exports fell by more than 36% while imports declined by over 47%, government data showed

The investment bank also said in its report that up until May 17, major parts of the economy operated at significantly less than full capacity, which is likely to continue weighing on economic activity. To be clear, some activities have gradually started to resume in low-risk districts around India. 

Ratings agency Moody's also sounded the alarm Friday in a new report, where it said the economic damage due to the lockdown will likely be "extensive and reflect (India's) inherent economic vulnerability and fiscal constraints." Fragile household consumption and sluggish business activity are expected to result in a "sharp decline" in growth, Moody's said. 

Why is India's growth slowing?
Why is India's growth slowing?

To mitigate the economic fallout, Prime Minister Narendra Modi's government announced a $266 billion support package containing both fiscal and monetary measures, said to be worth around 10% of India's GDP. But, economists have said the package will do little to stimulate growth as it includes very little planned government spending and benefits of several measures are expected to only be seen in the medium term. 

Mishra said Goldman's calculations showed the discretionary component of the fiscal support announced thus far, which would give direct financial support to households and businesses, remains small, at 1.3% of GDP. That figure is comparatively lower than what other economies have announced and much less aggressive than India's policy response to the global financial crisis in the last decade. 

Still, the investment bank expects a "strong sequential rebound" in subsequent quarters.