Police near a barricade at the entrance to a residential area in Mumbai where several people tested positive for Covid-19, during a government-imposed nationwide lockdown on March 31, 2020. Photo: AFP / Indranil Mukherjee

State Bank of India, the country’s largest lender, expects the annual gross domestic product to contract more than it had earlier estimated. In its Ecowrap report the bank revised its estimate to 10.9% from 6.8%.

This downward revision in the annual forecast for the economy comes days after the National Statistics Office data showed the country’s GDP contracted 23.9% in the April-June quarter. This was India’s worst quarterly performance on record, and has been attributed mainly to the countrywide lockdown to contain the Covid-19 pandemic.

The lockdown was imposed on March 25 and though it was initially meant to last 21 days, it was extended until the end of May. All commercial and private establishments remained closed, drastically curtailing economic activity. All sectors except agriculture, which grew 3.4% as rural areas were relatively less affected by the pandemic, registered sharp declines in the first quarter. Industry was worst hit with a fall of 38.1% while the services sector was down 20.6%.

The report estimates that growth will be negative during all four quarters of FY21, and that the full year decline will be in “double digits (around 10.9%).” For the second quarter the contraction will be in the range of 12-15%, while for Q3 it will be 5-10% and for Q4 2-5%.

It said the measures to contain Covid-19 have crippled consumption of most essential items. It also impacted expenditure patterns under individual consumption expenditure components like health and education. On the other hand, investment demand is failing to recover due to unutilized capacity, it noted.

The report also warns that India’s rural economy may be losing steam after leading the economic recovery in the first few months of the pandemic. It pointed out that for 12 Indian states, more than two-thirds of the loss in gross state domestic product in the current fiscal was contributed by rural areas. Chhattisgarh, Assam, Himachal Pradesh, Bihar, Odisha, Andhra Pradesh, Telangana, Uttar Pradesh and Madhya Pradesh are among the states that are seeing a substantial loss contributed by rural areas.

On a positive note, the report said that all major sectors, barring industry, experienced credit growth in July. It also noted that the banking sector was able to insulate itself from the lockdown disruption by implementing measures like remote work. New projects were announced in roadways, basic chemicals, electricity and community services such as hospitals and water sewage pipelines.

The report calls for the revival of sectors such as construction, trade, hotels and aviation and the restoration of transportation services. It also suggests that states should be supported through fiscal measures.