UBS sees economy turning green in H2

This will help the economy end the current year ending March with a 7.5% contraction, which is 1 full 100 bps more optimistic than the consensus forecast and and even lower than the latest government forecast of 7.7%

By   |  Published: 13th Jan 2021  8:49 pm

Mumbai: Swiss brokerage major UBS Investment Bank sees the economy carrying forward the unexpected recovery seen in the second quarter into the third and GDP most likely turning green or contracting by only 40 basis points (bps) and closing the March quarter with a 80 bps growth.

This will help the economy end the current year ending March with a 7.5 per cent contraction, which is 1 full 100 bps more optimistic than the consensus forecast and and even lower than the latest government forecast of 7.7 per cent. In the midst of the pandemic, the economy tanked in the quarter to June ravaged by the lockdown, printing in the worst growth numbers in history at a massive -23.9 per cent, but dramatically improved in the second quarter with a contraction of just 7.5 per cent.

This massive improvement has many analysts revising upwards the full year numbers in a 7-8.5 per cent range. The government too last week forecast a contraction of only 7.7 per cent. “We see the economy turning around and likely to print positive GDP numbers both in the December and well as march quarters. By the March quarter, the economy should be in the green printing in 0.80 per cent growth or more, helping the full fiscal close with only 7.5 per cent contraction only,” Tanvi Gupta-Jain, the India chief economist at UBS Investment Bank said.

She said the 7.5 per cent contraction for the year to March 2021 is a full 100 bps better the consensus average and 20 bps better than even that of the latest government forecast of 7.7 per cent contraction of the economy.

The economist expects the economy normalising from the first quarter of FY22 on the back of the continuing growth in the least-contact segments of the economy, while high-contact sectors picking up from Q2. But she is quick to underline that all these are contingent on the vaccines hitting the market at an affordable rate from early 2021. She expects the economy to clip at 11.5 per cent in FY22, reflecting the deeper 7.5 per cent contraction in the current fiscal, on the back of the massive recovery in consumption that resumed in the second quarter.

Expecting a V-shaped recovery from the fourth quarter of FY21 onwards, she expects FY23 growth to stabilise at 6 per cent given the high base in Fy22. She expects the combined fiscal deficits of the Centre and the states to come in at 11.5 per cent of which the Central deficit will be 7 per cent of GDP and the states’ at 4.5 per cent.

‘GDP may clip at just 6% in FY22 if vaccine distribution is delayed’

A delay in COVID-19 vaccine distribution could impact GDP growth prospects in the next fiscal year and the Reserve Bank may cut policy rates by 50 basis points by June as inflation cools down, a foreign brokerage said on Wednesday.

BofA Securities said it expects GDP growth at 9 per cent in 2021-22 if the vaccine distribution is done in the first half of the new fiscal year but may be just at 6 per cent if the distribution is deferred to the second half (October-March).

For the current financial year, it expects GDP to contract by 6.7 per cent as against the government’s estimate of 7.7 per cent contraction. It can be noted that a slew of policy measures have been taken in the recent past including deep rate cuts, which had to be halted because of a surge in inflation to beyond the upper end of the range set for RBI.

Speaking to reporters a day after official data suggested a sharp cool-down in the consumer price inflation to 4.6 per cent in December after being consistently above 6 per cent, its India economist Indranil Sen Gupta said BofA expects the RBI to cut rates by 50 basis points by June before it starts hiking them again.

From a growth perspective, the brokerage said India will be the third biggest economy in the world in the next decade. Growth will be driven by a demographic dividend which will be driving investment, rising financial maturity and emergence of mass markets, it said. Gupta pitched for a fiscal stimulus in the budget to address the demand side concerns, and keeping the fiscal deficit at 5 per cent of the GDP for FY22.