New Delhi, Dec 16 (IANS): India's GDP contraction due to the impact of Covid pandemic is expected to narrow down to (-)7.4 per cent in FY21 from an earlier projection of (-)10.9 per cent, SBI Ecowrap report said on Wednesday.

"Our revised GDP estimates are based on SBI 'Nowcasting Model' with 41 high frequency indicators associated with industry activity, service activity, and global economy," the report said.

"We have used the dynamic factor model to estimate the common or representative or latent factor of all the 41 high frequency indicators from Q4 of 2012 to Q4 of 2020 (till November actual data is used while trend is used for December)."

Accordingly, the report said based on this model the forecasted GDP growth for Q3 would be around 0.1 per cent (with downward bias).

Besides, out of the 41 high frequency leading indicators, 58 per cent are showing acceleration in Q3.

"Positive momentum of various economic indicators including RTO transactions, revenue collection at RTO, revenue earning of freight traffic, weekly food arrival, petrol and diesel consumption continued in November," the report said.

"Even our business activity index which is based on high frequency indicators show improving momentum after a modest decline in the week of Diwali."

Furthermore, the FY22 GDP growth would be at 11 per cent primarily due to base effect.

However, the report said all projections are conditional on the absence of another wave of infections.

"We believe that it will take almost 7-quarters from Q4 FY21 (and 5-quarters from now) to reach the pre-pandemic level in nominal terms and there will be a permanent output loss of around 9 per cent of GDP," the report said.

"Interestingly, even as growth outlook has improved, the decline in Government expenditure has been quite significant to Rs 3.62 lakh crore in Q2 FY21 from Rs 4.86 lakh crore in Q1 FY21."

"The revenue and capital expenditure both declined in Q2 compared to Q1, with larger decline witnessed in revenue expenditure."