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Economy may contract 3-9% in FY21, says McKinsey

India’s gross domestic product (GDP) could contract between 3% and 9% in the current fiscal year depending on the effectiveness of the steps taken to contain coronavirus infections and the government’s economic policy responses, McKinsey Global Institute said in a report.

The report titled ‘India’s turning point’ also warned that the pandemic-induced economic shock could put the banking system under stress, leading to a rise in bad loans by 7-14 percentage points in FY21 if the financial strain on households, small businesses, and corporations is not mitigated. Steps by the government and the Reserve Bank of India (RBI) to mitigate this, however, could moderate the pandemic’s effect on non-performing assets, the report said.

“Even before the pandemic, India’s economy faced structural challenges and GDP growth fell to 4.2% (in FY20). The crisis compounds the challenge. In the absence of urgent steps to spur growth, India risks a decade of stagnating incomes and quality of life,” said the McKinsey report.

To bring the country back to a sustained 8-8.5% economic growth rate and to sustain it till 2030, the McKinsey report proposes a series of reforms including a flexible labour market regime with a stronger social security net, removing anomalies in duties, tax breaks for home ownership, and power sector reforms.

The report called for reducing the cost of capital and says about four percentage points of household savings could move to financial products through measures to unshackle insurance, pension funds, and capital markets.

The report estimates that the economic package announced by the government to help poor households and to revive the economy will have an impact on fiscal deficit for FY21. “Coupled with contracting GDP and reduction in government revenue, this could lead to an incremental central fiscal deficit of about four percentage points over the budgeted 3.5% of GDP, with possible medium-term implications on government borrowing as well,” it said.

The forecast of a 3-9% contraction in economy this fiscal comes against the backdrop of RBI cautioning in its 2019-20 annual report released on Tuesday that the contraction in economic activity is likely to prolong because of movement restrictions imposed by local authorities to fight the pandemic. RBI also said that the rise that became visible in high-frequency economic indicators in May and June appear to have lost strength in July and August, suggesting that economic contraction will extend to the second quarter.

Investment bank Barclays had earlier this month revised downward its growth projection for India in FY21 to a contraction of 6% from a contraction of 3.2% estimated earlier as rise in coronavirus infections weighed on growth prospects.
Source: Live Mint

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