Economy set to fall off a cliff

Notwithstanding the economic packages announced by the Centre so far, India is staring at a recession in the wake of the Covid-19 pandemic. Going by the dire prediction of GDP contraction made by rating agency Crisil and State Bank of India’s Economic Research Department for FY21, India’s economy is set to fall off a cliff.

While Crisil has forecast India’s GDP growth to contract 5 per cent in fiscal 2021, SBI’s Economic Research Department (ERD) has painted a grimmer picture, pegging the real GDP growth at minus 6.8 per cent.

The GDP contraction forecast comes against the backdrop of the Reserve Bank of India Governor Shaktikanta Das stating late last week that “the global economy is inexorably headed into recession.”

Crisil warned that the first quarter will suffer a staggering 25 per cent contraction. SBI’s ERD believes that Q1 (April-June) GDP FY21 loss will be humongous and could even exceed 40 per cent.

Moody’s Investors Service, in a recent report, observed that even before the coronavirus outbreak, the economy was growing at its slowest pace in six years. The economic impetus from direct fiscal spending is also limited, it added.

Fourth recession

According to Crisil, in the past 69 years, India has, as per available data, seen only three recessions — in fiscals 1958, 1966 and 1980. The reason was the same each time — a monsoon shock that hit agriculture, and then a sizeable part of the economy.

“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,” according to the Crisil report.

NR Bhanumurthy, Professor, National Institute of Public Finance and Policy (NIPFP), told BusinessLine that “a lot will hinge on how the stimulus measures are implemented, especially ensuring quick credit disbursement by banks. There could be some measures with fiscal expansion in the right places. These could include pushing more money in ongoing projects, allocating more resources for rural development as the multiplier impact will be quick as well as bank recapitalisation.”

SBI’s ERD has estimated the district-wise, zone-wise loss in gross state domestic product (GSDP) for each State and found that the total GSDP loss due to Covid-19 for states in FY21 stands at ₹30.3-lakh crore, which is 13.5 per cent of the total GSDP.

A state-wise analysis indicates that the top 10 States accounted for 75 per cent of the total GDP loss, with Maharashtra contributing 15.6 per cent, followed by Tamil Nadu (9.4 per cent) and Gujarat (8.6 per cent). These three States also have the largest number of confirmed Covid-19 cases in India, ERD said.

Crisil assessed that about 10 per cent of gross domestic product (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.

To catch-up would require average GDP growth to surge to 11 per cent over the next three fiscals, something that has never happened before, it added.

Madan Sabnavis, Chief Economist, CARE Ratings, said: “What the Government should ideally do is to announce some major tax cuts so that spending power at the individual level increases. Then the you (Government) have to get rid of the lockdown for sure because if I can’t step out, I will not buy or go in for any discretionary spending. In fact, you should work on the premise that if today you lift the lockdown, there is a certain amount of pent-up demand which will come to the fore.

“...Also, since corporates will be making losses this year, they too will need some breather on the tax front. The government should also take up infrastructure projects and start spending money. That is the only way to create jobs and demand.”