A worker wearing personal protective equipment attends a customer at a hair and beauty salon in Ahmedabad. Photo: Sam Panthaky/AFP

India’s central bank has an onerous job when it meets later this month to revive growth after the economy contracted the most among major economies in the June quarter and could post a double-digit contraction in the full year.

To add to its troubles, China is bleeding the economy by threatening an armed conflict after encroaching on India’s territory.

Goldman Sachs predicts the economy could contract by 14.8% compared with its earlier 11.8% projection. The world’s largest lockdown for two months at less than four hours’ notice threw production off track. Gradual and sporadic relaxation of the lockdown followed by unscheduled and uncertain re-imposition from a few days to more in different parts of the country made resumption of economic activities a challenge.

India posted a 23.9% contraction in its gross domestic product (GDP) for the first quarter ended June 30 as economic activity began to restart. But with critical services including travel, tourism, hotels, professional services and real estate yet to resume, the outlook for full-year growth has been revised downwards.

Adding to India’s woes are its highest daily increases in Covid-19 to more than 90,000. India has 5.5 million cases and seems to be closing in on the 7 million cases in the United States. Brazil has 4.5 million cases.

The incursion by China into India’s northern territory of Ladakh from May too is stretching India’s resources and pushing up its defense budget just when it needs to keep costs down.

With this as the backdrop the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will have a tough balancing job when it meets on September 29 and 30. The RBI will announce its growth outlook and any policy or interest rate action to lift growth on October 1.

“By all indications, the recovery is likely to be gradual as efforts towards reopening of the economy are confronted with a rising number of infections,’’ RBI governor Shaktikanta Das said last week.

India’s leading credit assessor, Crisil Ltd, revised its forecast to a 9% contraction for the full year from 5% contraction prediction in May.

“With the pandemic’s peak not yet in sight and the government not providing adequate direct fiscal support, the downside risks to our earlier forecast have materialized,’’ Dharmakirti Joshi, chief economist wrote.

“If the pandemic were to peak out in September-October, GDP growth could move into mildly positive territory towards the end of this fiscal. But the risks to our outlook remain tilted to the downside till such time a vaccine is found and mass produced.’’

Likewise CARE Ratings revised its projection to 8% contraction from 6.4% earlier. In the quarter ended June 30 too CARE had expected 20% contraction, lower than the actual 23.9% negative growth. The reason for its downward revision is expectation of no additional fiscal support from the government to increase capital expenditure.

“The decline in GDP would also be associated with a decline in the gross fixed capital formation,’’ Madan Sabnavis, chief economist wrote in a report. “The same would hold for consumption growth that will be affected by lower growth in income across all categories of consumers.”

The sector which has been lifting growth is agriculture, and rural economy-related activities. The segment, which contributes 16.5 % to the GDP employs as many as 40% of the workforce.

One key reason for the slowdown and contraction in GDP is the lack of fresh investment and contraction of demand. Wage earners were locked up for more than two months forcing them to eat into their savings. Even after the lockdown was lifted, demand has not risen to pre-Covid levels.

Economic slowdown has also hurt tax collections to the extent that the central government is unable to compensate states of their share in Goods and Services Tax (GST). Surveys show most individuals are cautious in their spending because of job losses and lack of fresh employment avenues.

Another source of misery is the micro, small and medium enterprises (MSMEs) crippled by the lockdown since they operate on smaller margins, but provide a large chunk of employment and exports. Strengthening rupee against the dollar and subdued demand overseas is crimping their revival.

A survey by CARE revealed that two-thirds of respondents expect to reach pre-Covid levels of business by March 2021. Yet, half of all MSME companies expect bad debts to rise. There was little enthusiasm for capacity expansion and 30% of the companies surveyed said they expected negative growth in sales this year.

Economists see large spending by the government as a potential way out of the morass. While many are concerned about the rising fiscal deficit, or the gap between what the government earns from revenue and its expenses, experts suggest ways out of it too.

A surge in share prices and stock market indices on the back of cheap money flowing in from the United States and other developed countries with low to zero interest rates can be used by the government to sell shares of government companies. Likewise, it could print more currency notes to lift the economy in the short run.

A key way out would be for the government to spend on large infrastructure projects to give large scale employment and reignite consumer demand from the so-called bottom of the pyramid.  This is what the United States did under Franklin D. Roosevelt in the 1930s to pull the economy out of the Great Depression.