Can India recover from negative GDP growth in 2020?

Indian FY21 GDP growth will inevitably be in a bad territory as the locking of coronaviruses led to severe disruptions in demand and supply, the Chairman N.K Singh of the 15th Finance Commission, said Monday. The country is expected to experience strong V-shaped recovery in the third and fourth quarter 

Singh said the economic expansion in 2022-23 will decide whether or not the growth revival efforts are successful and stated that global economic downturn would continue to cloud growth prospects for the next fiscal year.

“This pandemic has led to massive economic lockouts that have triggered significant dislocation on both supply and demand sides," said Singh at an AIMA event here. 

"Q1 or Q2 would not be strong results, at least, and I think there will be a very fast rebound in V type in Q3 and Q4 of the current fiscal year; not exactly something major, but a smaller one. However, the whole fiscal year will end on a pessimistic direction" he said.

The economic growth of India in 2019-20 has been forecast at 4.2%. Present year growth forecasts by numerous global and domestic institutions suggest a rapid contraction of (-)3.2 to (-)9.5% in the Indian economy. The International Monetary Foundation (IMF) and the Asian Development Bank ( ADB) have set the number at 4,5% and 4% respectively, while the World Bank aims to contract an Indian economy in 3.2%. The growth outlook for S&P and Fitch was 5%, while the outlook of the group Nomura in 2020-21 is (-)5%.

Most recently, ICRA updated its GDP decline estimate for the current fiscal year to 9.5% as opposed to 5% previously, noting that ongoing lockdowns in some countries impacted the recovery observed in May and June. 

Singh also said that the optimal GDP debt-to - GDP ratio would be 60% for a nation of Indian size, which would entail a fiscal deficit alignment with that debt-to - GDP target in the medium term. In 2019-20, India's GDP debt ratio crossed 70% of GDP and will reach 80% in the current fiscal year. 

Singh said in terms of bank recapitalization that the banking recapitalization programme needs to be much more concrete and definitive. "I suspect there will be tremendous public expenditures over the next five years that will be required to rehabilitate PSU Bank adequately," he said.

The negative economic growth projection of RBI is in contrast to the 2 per cent optimistic outlook of the Finance Minister but is consistent with a projected 5 per cent in the financial year from leading couriers like Goldman Sachs.

"The combined impact of demand contraction and supply interruption in the first half of this year will decline economic activities. ... GDP growth in 2020-21 is expected to remain in the negative area with development impulses picking up at some stage from H2:2020-21 on," said Governor Das, who also reported a 40-base stage repo rate reduction to historic 4 per cent. On 27 March, 75 basis points were cut by the RBI.

The two-month lockdown had a significant impact on the recorded domestic economic activity which added high-frequency indicators to indicate that demand collapsed in both urban and rural areas from March 2020 onwards. "The consumption of energy and oil products – indicators of four days a day's production – has plummeted into sharp declines."

The Governor emphasised that "the greatest hit from COVID-19" was "internal consumption," comprising nearly 60 per cent of domestic demand. Market sustainable products demand dropped by 33% in March 2020, combined with the 16% decrease in the production of non-sustainable goods, and similar data is expressed in surveys of the rapidly evolving customer space, he added.

"As long as the economic activity is restored in process, especially during the second half of this year, and taking into account favourable baseline results, it is expected to establish the conditions for a gradual revival of activities during the second half of 2020-21 through the combinations of fiscal, monetary and administrative initiatives currently in place.

"As long as economic activity has been phased in the 2nd half of this year, and taking account of the favourable basis effect, the government and the RBI are expected to establish the conditions for a gradual resurgence of business during the second half of 2020-21 in combination with fiscal, monetary and administrative action. 

RBI Governor Shaktikanta Das claimed in a televised speech that the global economy is in recession. He said the "very volatile" inflation forecast. 

He claimed and added that the top six developed countries which account for 60 per cent of the Industrial Production in India have been largely in red and orange zones, "Home economic activity has been severely affected by the two-month lockdown. He said that the market for high-frequency indicators is diminishing and demand for energy and petroleum supply is plummeting. 

The greatest blow is to private consumption, which constitutes 60% of domestic demand, according to the governor.

"It is predicted that GDP growth will stay on the negative territory in the 2020-21 second half, where there is some demand stimulation," he said. In the first half of the current financial year, Das said headline inflation will remain firm and simple to achieve in the later part of the year.