India is going through a “technical” recession, with gross domestic product contracting for two consecutive quarters, but experts differ on the time needed for its recovery.
India’s central bank has forecast the country’s economy is likely to contract by 7.5% in 2020-21 and this will be the first full-year contraction since 1979-80 (-5.2%).
In the first quarter, gross domestic product had contracted to a record 23.9%, followed by a contraction of 7.5% in the second quarter. Though the steep fall in growth numbers is attributed to the Covid-19 pandemic, it should be noted that the country’s growth was already on a decline since Q4 FY17, and in Q4 FY20 it was mere 3.1%.
Former chief statistician and noted economist Pronab Sen, however, paints a grim picture of the economy. In an interview with the Press Trust of India, he expressed concern about the country’s macroeconomic situation and expected gross domestic product to contract 10% for the current fiscal year.
He said the Narendra Modi government’s overall management of the economy was not very good, but the current slowdown induced by the Covid-19 pandemic has put things beyond its control.
“At the moment India’s current macroeconomic situation is very uncertain. I would say we should be very very cautious. I think there is too much optimism going around,” he said.
Sen pointed out that the quarterly growth numbers are still derived from some corporate accounts and they have not fared as badly as the non-corporate sector. “We know that small industries have been hit much harder than the corporations. So, the headline number coming out in the national accounts is an overly optimistic picture of the economy,” he said.
The noted economist also felt it was crucial to reviving investor confidence at this juncture. Investors are new people who put their money into creating new production capacity, that is completely missing, he said, adding that until that comes back the economy cannot grow.
Sen said that at present, production capacity will not be much higher than it was in 2019-20. In fact, it will be less than that because some of the capacity may have closed down, he added.
Another economist, Nouriel Roubini, has said the 25% rise in Indian corporate profits in the September quarter, amid a sharp contraction in GDP, was on the back of wage squeezes that will lead to a rise in inequalities. This rising inequality is “dangerous” politically and socially because only a few people in the economy are benefiting, the economics professor at New York’s Stern School of Business observed.
In order to curtail the spread of coronavirus, the Modi government had announced a nationwide lockdown giving barely four hours notice. It started on March 25 and though initially it was meant for only 21 days, the lockdown was extended twice and lasted for two months. Apart from essential services, all other economic activity came to a standstill.
The abrupt closure of factories and business units dealt a body blow to workers. Employers abandoned them, landlords told them to vacate their dwellings and their labor contractors vanished.
Penniless and dependent on charitable organizations, the workers walked, cycled and hitchhiked on trucks to reach their homes hundreds of kilometers from their workplaces.
After the lockdown was eased, many factory owners faced the challenge of restarting their units due to a labor shortage. Conditions stabilized much later. The worst-hit sectors due to this reverse migration were manufacturing, retail and wholesale trade, mining and hospitality. All this disruption and turmoil took a heavy toll on the growth numbers in the first and second quarters.
However, the contraction in the second quarter was less than market analysts had forecast. This has given rise to a sense of optimism and many brokerages have now revisited their fiscal year forecast for India.
While the ADB and Moody’s have narrowed their contraction predictions, S&P has retained it at 9%. Japanese brokerage Nomura is hopeful that in the next calendar year India will be the fastest-growing Asian economy and register growth of 9.9%.