The Indian economy is headed for its fourth recession since independence, which may also prove to be its worst. That’s according to a report put out by Crisil Research on Tuesday.
Crisil expects real gross domestic product to contract by 5% in FY21, in line with forecasts put out by economists at Goldman Sachs, Nomura, Kotak Institutional Equities and others. The first quarter will suffer a staggering 25% contraction, Crisil said.
In addition, Crisil forecasts a 10% “permanent loss of GDP” as, over the next three years, India is unlikely to move back up to the levels of GDP that would have been achieved under pre-Covid growth scenarios.
India’s Fourth Recession
Crisil ’s forecast of a 5% contraction follows its earlier estimate of 1.8% growth, put out on April 28.
Things have only gone downhill since, DK Joshi, chief economist at the agency, wrote in a report. “While we expect non-agricultural GDP to contract 6%, agriculture could cushion the blow by growing at 2.5%.”
According to Crisil data, India has faced a recession only thrice in the past 69 years—in fiscals 1958, 1966 and 1980. In each of those instances, the recession was brought on by a monsoon shock that hit agriculture, then a sizeable part of the economy.
Despite relative easing of restrictions in the latest phase of the lockdown, economic activity continues to be disrupted.
A rough estimate based on a sample of eight states, which contribute over half of India’s GDP, shows that their ‘red zones’ contributed about 42% to the state GDP on average. On average, the orange zones contribute about 46%, while the green zones contribute only about 12% to state GDP. This could be broadly indicative of the scenario at an all-India level.
In addition, the government’s recently announced economic package has some short-term measures to cushion the economy but is mostly focused on medium-term reforms. Crisil estimates the fiscal cost of this package at 1.2% of GDP.
As such, the negative impact on GDP is expected to massively outweigh the benefits from mild fiscal support and low crude oil prices, especially in the April-June quarter. “Consequently, we expect the current quarter’s GDP to shrink 25% on-year,” Joshi wrote.
‘10% Permanent Loss Of GDP’
risil also cautions that India will face a 10% “permanent loss of GDP.” It defines this as the gap between the likely level of GDP which would have been achieved at pre-Covid growth trends and what it will likely end up at at post-Covid growth trends. It assesses this gap over a three-year period.
“We believe a catch-up to the pre-crisis trend level of GDP will not be possible in the next three fiscals despite policy support. Under the base case, we estimate a 10% permanent loss to real GDP (from the decadal-trend level), assuming average growth of about 7% between fiscals 2022 and 2024,” Joshi said.
Crisil noted that after the global financial crisis, a sharp growth spurt helped India catch up with the trend within two years. Massive fiscal spending, monetary easing and swift global recovery played a role in a V-shaped recovery. “To catch-up would require average GDP growth to surge to 11% over the next three fiscals, something that has never happened before.”