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COVID-19 lockdown has left India staring at its first recession in 40 years, say experts

The country saw economic activity in states with high COVID-19 cases suffering prolonged disruption as restrictions could continue longer.

Published: 26th May 2020 05:26 PM  |   Last Updated: 27th May 2020 01:44 PM   |  A+A-

Recession

The past three recessions seen in 1958, 1966 and 1980 were all tied to one reason — unfavourable monsoon — which broke the economy’s back. (Express Illustration)

By Express News Service

HYDERABAD: The COVID-19 lockdown has brought India’s economic activity to a standstill, and latest economic forecasts reinforce fears of a sharper de-growth. After crunching some numbers on Tuesday, research firms Crisil and SBI Research were convinced that FY21 GDP will shrink 5% and 6.8%, respectively. These estimates are in line with foreign research houses, which first delivered the shocker last week that India is on course to witnessing its worst recessions this fiscal.

It’s down to the wire, but if it happens, it will be for the fourth time the country will course through a recession. Incidentally, the past three recessions seen in 1958, 1966 and 1980 were all tied to one reason — unfavourable monsoon — which broke the economy’s back. This time, however, agriculture, which accounts for 17% of the GDP, could swing the balance and end up as the last man standing for growth, provided monsoon plays ball.

But even if agriculture clocks its trend-line 2.5% growth, non-agricultural GDP is likely to contract 6%, leaving the economy in the lurch. “The recession staring at us today is different. For one, agriculture could soften the blow this time by growing near its trend rate, assuming a normal monsoon. Two, the pandemic-induced lockdowns have affected most non-agriculture sectors. And three, the global disruption has upended whatever opportunities India had on the exports front,” said Dharmakirti Joshi, chief economist, Crisil.

He believes it is a long road to recovery and the famed 7-8% growth is at least three years away.

The lockdown extension, higher economic costs and an economic package that lacked muscle derailed economic activity, the costs of which have begun to show up in hard numbers. This, Joshi believes, is far worse than the initial expectations. “Given one of the most stringent lockdowns in the world, April could well be the worst-performing month for India this fiscal,” he said.

Crisil expects Q1 GDP to shrink by 25%, while SBI estimates an even sharper contraction of 40%. That’s because states could lose a staggering Rs 30 lakh crore, with red zones taking maximum loss of 50%. Include orange zones and the loss nearly doubles to 90%. Taken together, the top 10 states, where much of red and orange zones exist, account for 75% of total GDP loss with Maharashtra contributing 15.6% of total loss followed by TN (9.4%) and Gujarat (8.6%). Meanwhile, Q4 GDP is likely to print at 1.2% (`1.4 lakh crore loss in absolute numbers) taking FY20 growth rate to 4.2%, which sounds far respectable than FY21 projections. Official data is expected to be released on Friday. 

Fitch cuts projection
Fitch Ratings on Tuesday forecast a 5% contraction of Indian economy in the current fiscal, on account of slump in economic activities and stringent lockdown. It had earlier projected 0.8% growth for 2020-21

10% of GDP in real terms could be permanently lost. So going back to the growth rates seen before the pandemic is unlikely in the next three fiscals

Crisil expects non-agricultural GDP to contract 6% in FY21, but agriculture could cushion the blow by growing at 2.5%. However, the overall growth will still be -ve

In the past 69 years, India has seen a recession only thrice - as per available data - in fiscals 1958, 1966 and 1980. The reason was the same each time - a monsoon shock that hit agriculture, then a sizeable part of the economy.

Crisil said the recession in the current fiscal (April 2020 to March 2021) is different as agriculture could soften the blow this time by growing near its trend rate, assuming a normal monsoon. The coronavirus lockdown, first imposed on March 25 and extended thrice till May 31, has curtailed economic activity severely. "The first quarter of this fiscal will be the worst affected," it said.

"Not only will the first quarter be a washout for the non-agricultural economy, services such as education, and travel and tourism among others could continue to see a big hit in the quarters to come. Jobs and incomes will see extended losses as these sectors are large employers," it said.

It also saw economic activity in states with high COVID-19 cases suffering prolonged disruption as restrictions could continue longer. Stating that the economic costs now beginning to show up in the hard numbers are far worse than initial expectations, it said that industrial production for March fell by over 16 per cent, exports contracted 60.3 per cent in April, and new telecom subscribers declined 35 per cent, while railway freight movement plunged 35 per cent on-year.

"Indeed, given one of the most stringent lockdowns in the world, April could well be the worst-performing month for India this fiscal," it said. Counting lockdown 4.0, Indians have had 68 days of confinement.

S&P Global estimates that one month of lockdown shaves 3 per cent off annual GDP on average across Asia-Pacific, it said adding since India's lockdown has been the most stringent in Asia, the impact on economic growth will be correspondingly larger.

"CRISIL forecasts India's GDP growth to fall off a cliff and contract 5 per cent in fiscal 2021. Earlier, on April 28, we had slashed our prediction to 1.8 per cent growth from 3.5 per cent growth. Things have only gone downhill since. While we expect non-agricultural GDP to contract 6 per cent, agriculture could cushion the blow by growing at 2.5 per cent," the report said.

On the Rs 20.9 lakh crore economic relief package announced by the government to support the economy, Crisil said the package has some short-term measures to cushion the economy but sets its sights majorly on reforms, most of which will have payoffs only over the medium term.

"We estimate the fiscal cost of this package at 1.2 per cent of GDP, which is lower than what we had assumed in our earlier estimate," it said.



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