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Expect GDP contraction of 1.2% in current fiscal, stimulus package will not create large multiplier effect: Morgan Stanley

Expect GDP contraction of 1.2% in current fiscal, stimulus package will not create large multiplier effect: Morgan Stanley

Expect GDP contraction of 1.2% in current fiscal, stimulus package will not create large multiplier effect: Morgan Stanley
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By Mousumi Paul  May 22, 2020 6:14:16 PM IST (Published)

Morgan Stanley in its report estimated that the GDP will contract by 1.2 percent in FY21, the deepest one in the last 40 years. The renowned broker house feels that the slow exit of the lockdown implies deeper economic pain. The brokerage believes that the social distancing measures and economic activity will not be eased before Q3Y20.

The lockdown has crippled the global economy and taken the world back by about 20 years. Both demand and supply side of the economy has been disrupted, and the government's continued effort to repair it does not seem to ease the pain. Looking at this trend, Morgan Stanley estimates the GDP to contract by 1.2 percent in FY21, the deepest in the last 40 years.

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The financial services company feels that the slow exit of the lockdown implies deeper economic pain. "There has been some relaxation in few districts to resume operations but key urban areas continue to remain in red zones and account for ~40 percent of the national GDP," said Morgan Stanley.
The brokerage believes that the social distancing measures and economic activity will not be eased before Q3FY20. Consumption demand will remain constrained due to weak conditions in the labour market (salary cuts, likely job losses), implying a slower recovery.
The report indicated that the recent fiscal measures will unlikely create any large multiplier effect in the near term. Recovery after the disruption will remain gradual. Weak private capex and fragile financial sector will continue to add pressure, it added.
With not much of a relief from the fiscal policy, the government will now focus more on the monetary measures to inject liquidity. Therefore, RBI could cut repo rate by up to 65 bps to 3.75 percent through Q3FY20, the brokerage said.
Morgan Stanley also directly pointed out that what India needs now more than ever is a direct stimulus in the form of increased spending/tax concessions.
It feels three key inputs are needed to normalize the pain -- easing of social distancing norms, resumption of economic activities and both monetary and fiscal policy support.
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