India could see a 19.2% drop in GDP amid the COVID-19 crisis, the worst among major Asian nations, analysts say

Even before the pandemic hit, Asia’s third-largest economy was in the midst of a slowdown.

India, once the world’s fastest-growing major economy, is set to record the steepest quarterly drop in gross domestic product in Asia, as it quickly becomes the global hotspot for coronavirus infections.

With more than 65,000 new infections a day and a total of cases exceeding 3 million in a country of 1.3 billion, India’s road to recovery appears to be long and difficult. A combination of monetary and fiscal measures to prop up the economy has fallen short, leaving millions of people unemployed and destitute, and businesses on the brink of bankruptcy.

Data due Aug. 31 will likely show GDP declining 19.2 percent in the quarter through June from a year earlier, according to economists surveyed by Bloomberg as of Friday. That would be the steepest contraction since the nation began publishing quarterly figures in 1996, and it’s worse than any of the major Asian economies tracked by Bloomberg.

Even before the pandemic broke out, Asia’s third-largest economy was in the midst of a slowdown as a crisis in the shadow banking sector hit new loans and affected consumption, which accounts for about 60 percent of India’s GDP.

The mid-March shutdown to contain the pandemic was a blow to the economy like no other. Activity came to a virtual halt when businesses closed and millions of workers fled the cities in search of their rural homes. That put GDP on course for the first annual contraction in more than four decades: a 5.6 percent annual decline, according to a separate Bloomberg survey.

The shutdown dealt an “unprecedented blow to the economy,” said Rahul Bajoria, chief India economist at Mumbai-based Barclays Plc, who estimates that GDP shrank 25.5 percent in the last quarter.

“With nationwide lockdown measures extended throughout April and May, and most states extending their own partial restrictions throughout June, the rural economy, government spending and commodities will likely be the only sectors mitigating some of the decline. “, said. said.

Data gaps

According to the Reserve Bank of India, transportation services, hospitality, recreational and cultural activities are particularly affected in the $ 2.8 trillion economy. The impact on demand is so severe that “it will take a long time to repair and regain the pre-Covid-19 momentum,” the RBI said in its annual report.

What Bloomberg Economists Say

Our analysis shows that some sectors of the economy – agriculture, information technology services, and central government spending – posted year-on-year growth despite disruptions caused by the pandemic. These sectors have slightly improved the negative impact of the lockdown, but the drop in GDP is still expected to be large and only marginally better than our previous expectation.

Abhishek Gupta, Indian economist

Additionally, there is a higher level of uncertainty surrounding the latest quarter data, given the lack of field surveys conducted by the statistics office during the shutdown, which led to incomplete reports of inflation and industrial production in April and May. Given that activity in India’s vast informal sector, which accounts for almost half of GDP, is unlikely to be reported, production in the formal sector could be used as a proxy and overestimate growth.

“The statistics office could announce a GDP contraction of 17.5 percent year-on-year, which could later be changed to a 25 percent contraction when the informal sector survey becomes available,” said Pranjul Bhandari, chief economist for India at HSBC. Holdings Plc. in Mumbai.

Weak support

The pandemic has caused historic GDP contractions in economies around the world. In India, the situation is worsened by limited fiscal support, leaving the responsibility of the central bank to provide most of the stimulus. The RBI has cut interest rates by 115 basis points so far this year, increased liquidity and transferred billions of rupees in dividends to the government. But with inflation above the central bank’s target, it is probably nearing the end of its easing cycle, leaving little room for further support.

Economists expect growth to rebound above 7% next year, mainly driven by stifled domestic demand and a rebound in agriculture and exports. However, that is likely to fall short of the recovery that followed the global financial crisis more than a decade ago, when growth averaged 8.2% in the two fiscal years after the crisis, driven by massive fiscal spending, monetary easing and a rapid global rebound. .

The pandemic aside, India still has deep-seated structural problems, from a weak and struggling banking sector to high public debt, which will divert government resources from responding to the current crisis.

“What worries me is the structural flaws that this extreme economic shock will expose in the long term, and how many years it will take for the economy to get back to where it was,” said Shumita Sharma Deveshwar, an economist at TS Lombard based in Gurugram, near New Delhi.