Indian rupees and a surgical mask dry in the sun after disinfection at a workshop in Kolkata. Photo: Debajyoti Chakraborty/NurPhoto

India’s economy will post its worst ever contraction – at least 9.5% – in the year to March 2021 as the country struggles to recover after the world’s harshest lockdown to contain Covid-19, its central bank says.

“For the year 2020-21 as a whole real GDP is expected to decline by 9.5%, with risks tilted to the downside,’’ the Reserve Bank of India said Friday.

“Manufacturing firms expect capacity utilization to recover in the third quarter of 2020-21 and activity to gain some traction from Q3 onwards. Both private investment and exports are likely to be subdued, especially as external demand is still anemic.”

The central bank expects the economy to turn positive only by the fourth quarter that ends on March 31. Sectors most resilient to the pandemic and labor intensive ones are likely to lead the recovery, RBI governor Shaktikanta Das said in the monetary policy statement.

Agriculture and allied activities, fast-moving consumer goods, two-wheelers, passenger vehicles, tractors, drugs and pharmaceuticals, and electricity generation are among the sectors expected to lead the recovery, Das said.

India’s GDP contracted by 23.9% in the first quarter of the financial year ended June 30.  This was the biggest contraction among the world’s large economies. In independent India’s history the economy shrank three times. In 1965 it contracted 2.6%, in 1972 by 5.5% and in 1979 by 5.2% because of crop failures or sharp surges in crude oil prices.

The World Bank Thursday forecast the Indian economy would shrink 9.6%. In September, the Asian Development Bank and Standard & Poor’s projected a 9% contraction. Global investment banks, securities firms and rating agencies earlier predicted full-year GDP contractions of up to 16%.

A two-month lockdown in March was intended to save lives and prevent the coronavirus from spreading. Later, localized and shorter lockdowns across states and cities severely disrupted production, throwing millions out of jobs, forcing more than 10 million workers to migrate back to villages from industrial towns.

The lockdown initially saved lives at the expense of livelihoods. But over time the pandemic spread across the country, claimed lives and livelihoods, and depleting purchasing power and savings.

India today is the second-worst affected country, with 6.9 million Covid-19 cases in total, 893,500 active cases, 8,944 critical cases and 106,500 fatalities. For the past month, India has been adding the highest number of daily cases.

Yet, the economy is beginning to see green shoots and the worst may be over, say some bankers and economists. Sales of cars and utility vehicles in September rose 35% year-on-year, and 37% over August. Tata Motors recorded its highest monthly sales in eight years. Cement dispatches in September rose to 5.21 million tonnes compared with 4.27 million tonnes a year earlier. Some other sectors are seeing a similar trend, which may also partly be release of pent-up demand.

The manufacturing purchasing managers’ index (PMI) for September rose to 56.8, its highest level since January 2012, as production picked up. The services PMI is yet to match the manufacturing.

The RBI, which has lowered its key interest rate by 120 basis points this year, Friday left rates unchanged with inflation looming at about 6.7%, higher than RBI’s comfort zone of 2% to 6%. It, however, promised availability of large amounts of credit for borrowers. It also ensured the average rate of borrowing by the government at the lowest level in 16 years despite government exceeding its borrowing target.

Also helping keep domestic interest rates stable is the strong overseas inflows into securities of listed and unlisted companies. The RBI has been buying the dollar to prevent a sudden gain in the local currency, while injecting rupee liquidity in the local market that prevents rates from surging. The rupee has gained to around 73.13 per dollar from almost 77 six months back.

“The statement by RBI is a perfect exposition of doing whatever it takes to revive growth,’’ said Dinesh Kumar Khara, chairman of State Bank of India, the largest government-owned bank.

“With growth projections at minus 9.5 percent and inflation set to be higher at least for now and the possibility of renewed infections in many countries, the monetary policy committee has rightly chosen to keep the policy stance accommodative and relying more on discretion-based policy responses rather than being strictly rule-based.’’

RBI committed one trillion rupees of Targeted Long-Term Repo Operations (TLTRO) under which banks can borrow at modest rate for three years. Under Repo (repurchase agreement), banks can borrow money from the central bank by lending securities for a pre-decided period, after which the securities and cash are exchanged back.

Zarin Daruwala, the chief executive of Standard Chartered Bank in India said the RBI has sent a bold message by prioritizing growth over inflation.

The RBI expects manufacturing to pick up in the fourth quarter.

“The Indian economy is entering into a decisive phase in the fight against the pandemic. Relative to pre-Covid levels, several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth,’’ said Das.

“By all indications, the deep contractions of the first quarter of 2020-21 are behind us. Silver linings are visible in the flattening of the active caseload curve across the country.’’