Goldman Sachs revises India’s GDP forecast to 10.3% for FY21

Goldman Sachs, the global investment bank has revised India’s GDP forecast for the ongoing financial year and expects economic activity in Asia’s third-largest economy to normalize faster than estimated, provided an effective COVID-19 vaccine is available.

According to a report, GDP growth is estimated at 13% in FY22 compared with 15.7% projected earlier. India’s gross domestic product is to contract 10.3% in 2020-21 against a contraction of 14.8% forecast in September.


Jonathan Sequeira and Andrew Tilton, economists at Goldman Sachs said, “We expect that the broad-based availability of an effective vaccine in India could allow containment policies and mobility to normalise by mid-2022.”

“This should allow a meaningful activity rebound in 2021, particularly in consumer-facing services sectors, where activity remains significantly below pre-covid levels,” they further added.

An effective vaccine in India will be able to provide a meaningful activity rebound in 2021 particularly in consumer-facing services sectors, where activity remains significantly below pre-pandemic levels however the pace of the rebound will be restrained by some economic scarring and a number of factors including a weak labour market, the hit to private sector incomes and balance sheets, tighter credit supply conditions and a limited impetus from fiscal policy.

The Purchasing Managers’ Index (PMI) for manufacturing hit a record 13-year high of 58.9 in October, while services PMI touched 54.1 for that month, marking the first month of post-lockdown growth for the sector and taking the composite index to 58.

The Reserve Bank of India (RBI), projected the economy to contract 9.5% in the current fiscal but expects growth to turn positive during the January-March, while finance minister Nirmala Sitharaman had said FY21 growth would be ‘near zero’.

India’s fiscal deficit is estimated at 8% of the GDP in FY21 and is expected to narrow to 6.5% of the GDP in FY22. The central government’s plus states’ fiscal deficit is estimated to narrow from 11.5% to 9.5% of the GDP in the same duration, the report said.

“This suggests that the total fiscal policy contribution to growth will decline further in FY22,” it further stated.

Inflation, as measured by the Consumer Price Index, is estimated at 6.2% in FY21, and is likely to decline to 4.6% in FY22 as food prices fall on easing supply restrictions, a benign monsoon, and favourable base effect, according to the report. Core inflation could also moderate given low manufacturing capacity utilisation and rupee appreciation.

“We expect RBI to cut policy rates by another 35 bp early next year,” said Goldman Sachs.

A sharp rise in the corporate interest burden and the consequent decline in debt servicing capability, potential tightening in credit supply, low manufacturing capacity utilization and the inventory overhang in residential housing could prove to be a drag on private investment seeing a rebound, Goldman Sachs further added.