India may have lost Rs 20 lakh crore during April-September

High-frequency indicators may be displaying signs of a recovery, but the anticipated economic output India has lost over the past six months will give us the chills. According to UBS Securities India, the Indian economy would have lost a staggering Rs 20 lakh crore or 10.5 per cent of GDP between April and September, 2020.

It also estimates potential growth to have slowed to 5.75-6.25 per cent due to the longer-than-expected disruption caused by the pandemic, balance sheet concerns faced by economic agents, and only a modest policy response so far. The government will announce Q2 GDP data on November 27. Even though economic activity appears to have returned close to pre-Covid levels, barring the pent-up demand in the September 2020 quarter, analysts expect normalisation in economic activity to proceed only at a gradual pace.

“There are also signs of pent-up demand as reflected in auto sales, but many believe this could taper off post festive season considering there is still much uncertainty and households’ face stretched balance sheets amid stagnant/reduced income levels and might prefer to increase their buffer of precautionart savings. Government’s fiscal response remains conservative. The revival in investment intentions and upcoming union budget focus on government spending momentum will be key to determining India’s economic growth outlook for next year,” noted Tanvee Gupta Jain, Economist, UBS Securities. 

India’s public debt-to-GDP is also expected to rise significantly to 90 per cent by FY22 from 72 per cent in FY20.  If that happens, it’ll be the third-highest after Argentina and Brazil among emerging markets. It means that the risk of a sovereign rating downgrade by at least one of the three rating agencies over the next 12-18 months cannot be ruled out. 

However, the temporary nature of fiscal stimulus and the likely rebound in nominal GDP next year will make it relatively easier to return the debt to more normal levels, after this crisis is over. “The general view is that India’s debt sustainability crucially hinges on its ability to maintain and improve its potential growth close to 6 per cent currently,” Jain said, adding that the renewed focus on productivity-enhancing reforms and investments could help reduce the downside risks emerging in India’s medium-term growth outlook. 

Meanwhile, FDI inflows to India rose to a record $56 billion in FY20 and the government estimates FDI pipeline to have risen to $165 billion currently. Jain expects FDI inflows could increase to $70 billion by FY23. The transfer of technical and organisational knowledge that accompanies these flows should help boost productivity and support growth.