Press "Enter" to skip to content

Why projected 9.5% fall in GDP makes this the worst recession in Indian history – and what it means

In late May, when India was still grappling with stringent lockdown measures instituted by the central government, Goldman Sachs predicted that the country will suffer the worst recession in its history since that triggered by the 1979 balance of payments crisis.
The firm projected that the Indian economy will shrink by a staggering 45 per cent on an annualised basis in the first quarter and by 5 per cent this fiscal year. While the investment banking firm’s dire first-quarter prediction, fortunately, didn’t materialise, the economy still recorded a troubling 23.9 per cent contraction during the months of April, May and June, far worse than any of the leading economies including the United States, China, and Germany.
Now, the World Bank in its latest report, South Asia Economic Focus, has forecast the Indian economy to plunge by 9.6 per cent this fiscal year, reflecting the impact of the nationwide lockdown, and the severe income-related shock experienced by households. It has predicted a growth rate of 5.4 per cent in the following fiscal under the assumption that the nation’s COVID-19 tally is kept in check, and all restrictions are lifted.

The 23.9 per cent contraction witnessed in the first quarter of this year is already the worst ever decline India has experienced since it began compiling GDP statistics on a quarterly basis in 1996. In a country like India, home to over 1.3 billion people, private consumption and investment are the primary drivers of growth. During the first quarter of 2020, private consumption, which accounts for 59 per cent of the nation’s GDP – declined by 27 per cent, while investments made by the private sector slumped by a whopping 47 per cent. Meanwhile, government spending only increased by 16 per cent.
In recent weeks, Finance Minister Nirmala Sitharaman has suggested that the Centre may be open to supporting the economy through fiscal means but till date, there remains no clarity on what a future stimulus package would look like, and which industries it will target. As such, the Centre’s failure to address the prevailing uncertainty in the economy isn’t likely to imbue much confidence into India’s households and lenders.
Historically, in times of a recession, households attempt to preserve cash, postpone travel plans, and delay big-ticket purchases such as automobiles or large electronics, instead adopting a ‘wait and watch’ approach which, ultimately, perpetuates the negative cyclical effect. Moreover, the falling rates of credit growth are reflective of the unwillingness of lenders to issue fresh loans in the face of the prospect of rising loan delinquencies despite the RBI’s series of measures to boost liquidity and lower interest rates.
But the World Bank has also pointed to the huge informal working population in India as a cause for grave concern. In the Centre’s original stimulus package, provisions were made for food rations and some monetary support to the nation’s worst-affected communities, but the absence of a dedicated social welfare net means that the actual slump in GDP growth could be even higher than that predicted by the World Bank.
While the last two weeks has seen a positive trend emerge with regard to India’s COVID-19 growth rate, the likelihood of a second wave of infections as we are now witnessing in several parts of Europe remains high. As such, if India is indeed subject to further lockdowns, the economic distress is likely to be even sharper. Read from source….