The macroeconomic woes brought on by Covid-19 are being reflected in government statistics. India’s gross domestic product (GDP) for the quarter ended June 2020 shrank by a record 23.9% annually, provisional estimates released by the Ministry of Statistics and Programme Implementation in end-August said. Now, a recent report by Motilal Oswal Financial Services says the GDP for the full year could contract by 6.5%.

Nikhil Gupta and Yaswi Agrawal, research analysts at the financial services firm, had earlier anticipated GDP growth for the quarter ended September 2020 to fall by 4.7%, as they were anticipating growth from August-September. However, the economic indicators for August show a modest improvement. Freight traffic declined by an annual 1.6% (the figure was 7.8% in July), while power production was down 2.1% (2.7%). And while daily e-way registrations declined by 3.5% year on year (In July it fell 7.3% year on year), fuel consumption declined faster by 16.2%, compared to the 12.3% fall in July.

Consequently, the analysts expect real GDP to contract approximately 7% in Q2 of FY21, worse than their earlier forecast of 4.7%. “Furthermore, we have revised down our forecasts for Q3FY21 to almost stagnant levels (from +1.3% earlier) and to 4.2% for Q4FY21 (from 4.6% earlier),” they noted in their report. “We believe real GDP could decline to 6.5% for the full year for FY21, marking the worst fall in the past seven decades.”

The other big worry is the central government’s burgeoning fiscal deficit. Gupta and Agrawal are of the view that with a likely slippage of 4% of GDP in the fiscal deficit of FY21, government spending for the remaining eight months could grow only 6.4% year on year—against 11.3% in April-July 2020, and 22% in the corresponding period a year ago.

Their calculations suggest that the central government’s fiscal deficit would be around ₹14.6 lakh crore—or 7.6% of GDP—in FY21, marginally higher than the ₹14.2 lakh crore predicted in June 2020. “The downward revision in receipts is almost entirely attributable to downward revisions in GDP forecasts,” they said in the report.

Their latest forecasts suggest that the total receipts of the central government could decline approximately 18% year on year in FY21, led by almost a one-third decline in corporate taxes and around a one-fourth decline in GST collections.

The other challenge accompanying the higher fiscal deficit is the likelihood of government spending to be highly skewed towards revenue (or current) spending this year. The report projects revenue spending growth at around 10% in FY21, while capital spending could decline by 2%-3%.

“If so, this implies capital spending would decline around 5% year on year in the remaining eight months of FY21, against 3.9% growth over April-July 2020,” the analysts said. “On the other hand, revenue spending would grow 8% over the August 2020 to March 2021 period, against 12.2% growth over April to July 2020.”

Clearly, the worst seems to be far from over as far as Covid-19’s impact on the economy is concerned.

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FY21 fiscal deficit seen at 7.6% of GDP