Beyond the short term, India’s fundamentals are sound

There is a relentless increase in the number of Covid-positive cases in India. The spread of the disease is no longer confined to major cities. The second wave of the pandemic seems to have set in, compelling State governments to intermittently impose lockdowns in several districts/localities while the nationwide lockdown is being lifted in a phased manner. Striking a balance between life and livelihood has become a delicate issue as a vaccine is yet to be found.

As the war against Covid-19 is still in full swing, any attempt to study its impact on the Indian economy will be provisional. Most of the agencies which had given their early estimates of India’s growth in FY21 have either revised or withdrawn their projections. According to the revised estimates of the IMF’s World Economic Outlook released in June, India’s real GDP is likely to contract by 4.5 per cent in FY21. More recent projections of India’s real GDP growth are disappointing, with the extent of contraction exceeding 6 per cent — Nomura projects minus 6.1 per cent growth, CARE Ratings minus 6.4 per cent, SBI minus 6.8 per cent and ICRA minus 9.5 per cent.

Growth predictions

Due to the prevailing uncertainties, neither the government nor the RBI has come out with any precise number with regard to India’s real GDP growth in FY21. Since Independence, India witnessed contraction of real GDP on four occasions — 1957-58 (minus 1.2 per cent), 1965-66 (minus 3.7 per cent), 1972-73 (minus 0.3 per cent), and 1979-80 (minus 5.2 per cent) — either due to failure of monsoon or energy crisis, or both. Thus, India is facing the severest contraction of GDP so far in FY21 due to the Covid-19 related lockdown.

While presenting the Budget in February, the government expected the economy to grow at 6 per cent in real terms and 10 per cent in nominal terms in FY21. Before the outbreak of Covid-19, this was reasonable, considering the low base in FY20.

The loss of India’s GDP in FY21 is revisited here based on certain assumptions (see Table). First, the nationwide lockdown was strictly followed in the first 40 days, which may cause at least 50 per cent GDP loss. The loss for the first seven days has been accounted for in FY20. Second, the extent of loss may be at least 25 per cent in the next 28 days, mostly in May, due to some lockdown relaxations in certain regions/sectors.

Third, the loss of GDP may be at least 15 per cent in June as further relaxations of lockdown were allowed based on spread of the disease. Fourth, the loss of GDP is assumed to be at least 10 per cent in the second quarter of FY21 due to local lockdowns in different parts of the country amid calibrated lifting of the nationwide lockdown. Fifth, assuming the second half to be either normal or at least 5 per cent below normal, two scenarios are generated. Most likely, the economy has to operate below normal at least by 5 per cent in the second half of FY21.

As per the baseline scenario, the loss of nominal GDP in FY21 is likely to be around ₹23 trillion if the second half of FY21 is normal (see Table). This works out to a contraction in GDP by 1.2 per cent in nominal terms and 4.7 per cent in real terms in FY21. If H2 FY21 is 5 per cent below normal, the loss of nominal GDP is likely to be about ₹28 trillion — a contraction of 3.9 per cent in nominal terms and 7.3 per cent in real terms. Based on limited data, India’s Q1 FY21 GDP has contracted by 23.9 per cent in real terms. Despite gradual improvement in the next three quarters, India faces the highest-ever real GDP contraction of around 7 per cent in FY 21.

Relief measures

The government’s Atmanirbhar package of ₹21 trillion, or 10 per cent of GDP, includes the RBI’s injection of ₹8-trillion liquidity besides a deep cut in the repo rate, with the exemption of SLR and regulatory forbearances. There are mainly three elements in the Atmanirbhar package — relief, rehabilitation, and structural reforms. Despite the ₹12-trillion borrowing in FY21, fiscal stimulus is hardly 1.2 per cent of the GDP, mainly due to the lack of fiscal space arising out of likely shortfall of revenues and disinvestment.

While rehabilitation is likely to protect employment, particularly in the MSME sector, structural reforms are expected to accelerate growth in the medium term, after complete normalcy is restored. With budget constraints, the government preferred to protect employment through credit guarantee rather than extend demand stimulus through cash transfers.

While the Atmanirbhar package is being implemented, there are several challenges going forward — flattening the Covid curve, expediting human trials of a vaccine against Covid-19, restoring employment, rebuilding the supply chain, and reviving the economy, besides resolving twin balance sheet problem. It will take time for certain sectors like travel, tourism, hospitality, entertainment, retail, live sports, logistics, events and conferences, fashion, real estate, etc to return to normalcy. Global headwinds are likely to continue.

However, there are opportunities in a few sectors like digital products, structured knowledge, online coaching/teaching, healthcare, insurance, network marketing, data science, artificial intelligence, alternative energy, contact-less economy, etc. India should seize the opportunities when challenges are daunting.

Although the near-term outlook is disappointing, India’s medium-term fundamentals are reasonably sound. There is no fear of external current account deficit as long as international prices of crude oil are reasonably low. India’s foreign exchange reserves, above $500 billion, will work as a war chest in case of an emergency. Agriculture is doing fairly well to provide much needed supply-side comfort in a trying time. India’s sovereign rating is still investment grade, which will attract foreign investments amid a reasonably stable exchange rate. Hopefully, India will experience a V-shaped recovery going forward.

The writer is former principal adviser and head of RBI’s Monetary Policy Department. Views are personal

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