The National Council of Applied Economic Research (NCAER) sees Indian economy contracting 25.7 per cent in first quarter of this fiscal with the lockdown affecting the country in the form of huge economic shocks.

This estimate is however without factoring in the ₹23-lakh crore fiscal stimulus (11.7 per cent of GDP) provided by the Centre and the ₹8-lakh crore liquidity infused by the RBI on the monetary side post the lockdown, according to the June update to the NCAER’s Quarterly Review of the Economy (QRE) released on Thursday.

Quarterly review

NCAER is among the few organisations that have put out a forecast for the quarter. Most think tanks and international bodies have put out annual growth forecasts.

The new QRE update sees the fiscal and monetary policy measures taken by the Government and RBI significantly containing the GDP decline this year. However, the actual outcome would depend on the strength of supply response and the extent to which the lockdown related supply disruptions are overcome, the NCAER said.

Borrowing requirement

After factoring in the stimulus, NCAER’s policy simulations suggest that the combined fiscal deficit would be contained below 8 per cent of GDP, implying a total public sector borrowing requirement of probably around 9-10 per cent of GDP.

The simulations also suggest that inflation would rise moderately to 6-8 per cent and the current account deficit would remain below 3 per cent.

“We expect the first quarter GDP (basically GVA) of 2020-21 to contract 25.7 per cent (without stimulus). This negative growth will continue till third quarter and move to 0.5 per cent growth in Q4 (without stimulus scenario). However, if fiscal and monetary policies are fully implemented without supply constraints, GDP growth could amount to 1.3 per cent in 2020-21,” NR Bhanumurthy, NIPFP Professor and Vice-Chancellor, BASE in Bengaluru, said at a webinar on the June update of NCAER’s QRE.

He said supply disruptions in the economy are more than demand disruptions.

NCAER Senior Fellow Bornali Bhandari said the economy had been slowing down even before the Covid-19 pandemic came in March and the economy had suffered negative shock in April and May due to the pandemic.

Agriculture doing well

Stating that agriculture has been doing well in the recent period and is now the only positive story, she highlighted that NCAER forecasts agricultural Gross Value Added (GVA) growth of 3 per cent for the first quarter and remaining quarters this fiscal.

NCAER sees industrial output recording a decline for the year as a whole, while services too recording negative growth in 2020-21.

NCAER Fellow Sudipto Mundle said he does not agree with the narrative in the media that the Government has not done much in terms of fiscal stimulus provided post Covid-19. “There is huge fiscal and monetary impact provided by the Government and RBI. From a level of (-) 12.4 per cent GDP contraction in situation of no stimulus, we could go to GDP growth of 1.3 per cent when stimulus is applied and there is no supply side constraints,” he said.

Mundle said the overall Government borrowing could be in the range of ₹17-21 lakh crore and it is not clear whether the Indian financial system, which is already under stress, can cope with the unprecedented requirement.

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