Coronavirus: India′s economy braces for lackluster recovery | Business| Economy and finance news from a German perspective | DW | 01.09.2020
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Coronavirus: India's economy braces for lackluster recovery

Once the world's fastest-growing economy, India has emerged as the biggest laggard among major economies. With coronavirus cases surging and the government's finances stretched, it's on a bumpy road to recovery.

The Indian economy posted its worst quarterly contraction between April and June, slumping by almost a quarter as a strict nationwide lockdown to curtail the spread of the coronavirus brought the country to a virtual halt.

Gross domestic product (GDP) shrank 23.9% in the second quarter from a year earlier, the biggest quarterly contraction on record. The decline was the worst among major economies, even surpassing a fall of 20% posted by the United Kingdom.

The economic pain was felt across industries and services, with agriculture being the only sector to grow, albeit at a slower pace. Private consumption — the main driver of the economy — fell nearly 27% on the year, while investment collapsed by 47%.

Economists say the figures do not capture the full extent of the havoc wreaked by the lockdown, especially on smaller companies and on India's "informal" sector, which accounts for 50% of the total output and employs more than 80% of the workforce. It's the part of the economy that includes jobs such as vegetable and fruit vendors, rickshaw pullers, and daily laborers — jobs that are not covered by legal contracts.

The informal sector was massively hit by the lockdown and saw hundreds of thousands of migrant workers return to their native places from cities, many of them by foot. Experts say the damage to the Indian economy might even be worse once their plight is taken into account.

Surging COVID-19 cases weigh on India's recovery

The chief economist at the Finance Ministry, Krishnamurthy Subramanian, said India was seeing a V-shaped recovery or a sharp rebound in the current quarter. Despite the expected recovery, India is on course for its first full-year contraction since 1980. 

The economy saw early signs of recovery in June, when lockdown restrictions were eased, with both services and manufacturing activity picking up. That recovery seems to be fading as domestic output and orders take a hit.

Economists say a recent surge in coronavirus cases would continue to hold back any rebound. India has been averaging 70,000 daily new infections over the past week, the most by any country, with total cases nearing 3.7 million.

The surge in COVID-19 cases is further expected to keep household consumption in check as people remain wary of stepping out of their homes. The uncertainty around the pandemic and its impact on the economy is also likely to prompt people to hold onto their savings.

The pandemic has led to massive job losses across the country. Nearly 20 million salaried people have lost their jobs since the lockdown, the Center for Monitoring Indian Economy said in August.

"With the ongoing pandemic leading to sporadic shutdowns across the country and the central government unwilling to step up fiscal policy support, we think India is now on course for a double-digit contraction this year," Priyanka Kishore of Oxford Economics said.

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Coronavirus lockdown hurt Indian industries 'dramatically'

Modi government has limited fiscal space

The Indian economy was struggling even before the pandemic with a banking crisis holding back consumption, a poorly implemented nationwide taxation regime, the Goods and Services Tax (GST) hurting smaller businesses, and a sudden ban on high-value currency notes crippling the informal sector. 

Economists say India's current economic woes have been compounded by the Modi government's unwillingness to loosen the purse strings. Prime Minister Narendra Modi announced a $266 billion (€221 billion) stimulus package in May, but it included hardly any new public spending, tax breaks, direct cash transfers to resurrect demand and prevent job losses. 

"The underwhelming fiscal response to the crisis will guarantee a legacy of higher unemployment, firm failures and an impaired banking sector that will weigh heavily on investment and consumption," Shilan Shah of Capital Economics said, adding that India's real GDP could still be 10% below its pre-virus trend at the end of 2022.

Experts, however, agree that the government has limited room to maneuver. Its fiscal deficit is expected to touch 7% of GDP in the current fiscal year, more than double its initial target.

With retail inflation above the Reserve Bank of India's 2%-6% range, there is limited space for even the central bank to act. The RBI has already cut the repo rate — the rate at which banks borrow from the central bank — by 115 basis points this year. It, however, decided to stay put in August when the inflation breached its target.

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