New Delhi, India's FY21 GDP is expected to contract at 7.8 per cent, ratings agency ICRA said on Thursday.

As per the agency, in Q3FY21, rising raw material and wage costs would partly counteract the positive impact of a modest rise in volumes in the industrial sector.

Consequently, with a steady performance of the agricultural sector and a lagged recovery in the contact-intensive parts of the services sector, ICRA forecasts a small contraction of 1 per cent in India's GDP in Q3FY21.

Besides, ICRA pointed out improving economic fundamentals, a bright outlook for rabi season, and visibility of vaccine availability are expected to strengthen demand.

Furthermore, an expected revival in exports and a rise in government spending would contribute to a mild 1.3 per cent growth in Q4 FY2021, ending the recession gripping the Indian economy.

"The recovery under way in the Indian economy in Q3 FY2021 is fragile, and appears prone to risks related to rising costs, as well as a re-appearance of supply-side disruptions in some states," said Aditi Nayar, Principal Economist, ICRA.

"We forecast a continued, albeit mild contraction in the Indian GDP of 1 per cent in Q3 FY2021. However, healthy procurement and a favourable outlook for the rabi season, as well as greater visibility of an approaching Covid-19 vaccine rollout, will strengthen demand and economic activity in Q4 FY2021.

"The technical recession is likely to end in that quarter, with a muted 1.3 per cent growth benefitting from a real recovery as well as the low base effect. This is expected to limit the contraction in Indian GDP in real terms to 7.8 per cent in FY2021."

According to ICRA, available data suggests that the recovery in consumer demand as well as volumes in Q3FY21 remains tentative in many sectors.

Besides, the urban consumer sentiment improved only modestly as per the latest survey conducted by the Reserve Bank of India.

"In our view, the spending seen during the festive season was driven by pent-up demand, and consumption is yet to fully stabilise in various sectors. While many indicators have displayed growth in the ongoing quarter relative to a weak performance in the same period in FY2020, volumes still remain below FY2019 levels in a number of sectors, highlighting that a full recovery remains somewhat distant," Nayar added.

"We await further confirmation of a broad-basing of demand in sectors such as automobiles and capital goods."

In addition, the rating agency noted that supply-side and logistical disruptions have re-emerged in some states.

Further, the tailwinds of low commodity prices are turning into headwinds, as the visibility of vaccine availability is now pushing up global commodity prices, it said.

Moreover, some companies have started to enhance salaries, lifting the freeze that had been instituted during the pandemic.

The rating agency cautioned that rising raw material and wage costs would absorb a portion of the improvement in profitability afforded by recovering volumes in Q3 FY2021.