The Reserve Bank of India headquarters in Mumbai. Photo: AFP

India’s economy is still reeling from the shock of the coronavirus and will take time to recover, the Reserve Bank of India (RBI) says. Contraction in economic activity in the first quarter of the financial year starting in April will probably extend into the second quarter, which ends in September.

“The upticks that became visible in May and June after the lockdown was eased in several parts of the country appear to have lost strength in July and August, mainly due to re-imposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into second quarter,’’ the RBI said in its annual report.

“Recovery will be led by private consumption though the shock to consumption is severe and will take quite some time to mend and regain the pre-Covid-19 momentum,’’  it said.

The RBI earlier predicted that the economy would post negative growth rate this year, led by a sharp contraction in economic activities, production, consumption and growth because of a country-wide lockdown from March 25 for about two months. Various states later imposed lockdowns of varying lengths and intensity, hurting the economy.

“Private consumption is expected to lead the recovery when it takes hold, with non-discretionary spending leading the way until a durable increase in disposable incomes enables discretionary spending to catch up,’’ it said.

A critical negative for India is that its economy was hit by the pandemic when it had already slowed for eight previous quarters. In the financial year ended March 31, India’s gross domestic product grew at 4.2%, the slowest in a decade, compared with more than 8% five years earlier. During the January to March 2020 quarter India’s GDP grew just 3.2%.

Discretionary private consumption has dropped drastically, especially in hospitality, recreation, cultural activities and transport services, and behavioral restraints may prevent the normalization of demand for these activities, the central bank said.

Urban consumption demand has suffered a bigger blow, with passenger vehicle sales and supply of consumer durables during the April-June quarter dropping by a fifth and a third respectively compared with the same period a year earlier. Air traffic came to a standstill. Any recovery in rural demand was held back by muted wage growth worsened by loss of income and jobs because of the migration to villages.

Comparing the impact on the economy of Covid-19 of 2020 with the global financial crisis of 2008-09, the RBI said economic growth was slowing when it felt the impact, unlike the years 2004 to 2009, when India was growing at about 8% each year.

India’s latest tally of 3.2 million cases puts it behind the United States with 5.9 million cases and Brazil with 3.6 million. Yet, with daily addition of cases holding at more than 60,000 for the past two weeks, India is in a much worse situation than the other two worst sufferers.

Consumer confidence too fell to an all-time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income, according to a RBI survey for July. Respondents indicated hope of recovery in the next year.

Leading indicators of investment demand such as construction, real estate, steel, cement and production of capital goods, showed sharp decline. During the April-June quarter production of capital goods contracted by 65%, cement by 39% and consumption of steel by 58%.

India will need more reforms to unshackle its manufacturing, infrastructure and logistics to be able to post rapid growth, it said. Since February 2019 the central bank has cut its key repo rate by 250 basis points, yet borrowing for making investment and consumption remains tardy.

Bureaucratic obstinacy plaguing land acquisition, environmental clearances, and project implementation, along with lagging infrastructure and logistics often hold back the economy from realizing its potential. Declining capacity utilization, subdued consumption demand and stressed balance sheets are restraining new investment, the central bank said.

India is ranked 70 out of 140 countries for infrastructure quality in the Global Competitiveness Index and logistics performance. In World Bank’s Logistics Performance Index (LPI) it is ranked at 44 among 160 countries, the RBI annual report said.