Govt's stimulus package won't stop GDP from contracting in FY21: Analysts

The government's reform moves and stimulus package will only help the deeply-impacted growth process in the medium term of over three years and will not push up the GDP in the short term, analysts at two foreign brokerages said on Monday.

The analysts at Bank of America (BofA) and Nomura maintained their earlier GDP estimates suggesting a contraction of 0.1 per cent and 5 per cent, respectively, for FY21 even after the announcement of the Rs 20 lakh crore economic package. 

Prime Minister Narendra Modi had last week announced a stimulus of up to Rs 20 lakh crore or 10 per cent of GDP, with a view to help arrest the slide in growth because of the COVID-19 pandemic. 

Finance Minister Nirmala Sitharaman announced the specifics of the package in a series of press conference ending Sunday.

The package may fall short of mitigating the near-term challenges for some businesses, but it is better designed to improve India's medium-term growth potential and attract long-term risk capital, analysts at the Japanese brokerage Nomura said.

They also added that there are no silver bullets in the package.

Concurring with this view, BofA analysts said reforms in agriculture, mining, power and industry, higher foreign direct investment in defence and opening up of all sectors to the private sector will help to push up potential growth over time. 

In the near term, GDP will likely contract by 12 per cent in the June quarter, and by 0.1 per cent in FY21, they added.

Maintaining its 5 per cent contraction estimate, Nomura said the government has aimed for maximum bang for minimum buck as most of the relief is either regulatory in nature or reflected in its contingent liabilities, rather than explicit budgetary support. 

The brokerage said the dent to the fiscal deficit as a result of the package will be only 0.8 per cent, and India will end FY21 with the gap number at 7 per cent.

It, however, welcomed that the government has used the crisis to push through politically sensitive reform measures. 

Nomura said that the packages have so far desisted from addressing the woes of particular sectors like travel and hospitality, and the additional money provided for employment guarantee will ensure migrants to stay back in the villages and may cause labour supply issues in cities. 

BofA said the Reserve Bank will go for a 0.75 per cent more of rate cuts by October and conduct open market operations of USD 75 billion to find the fiscal deficit. 

The Finance Ministry will follow up with interest subventions for small businesses and real estate, and use instruments like recap bonds to recapitalise state-run lenders, it added.