The Indian economy is expected to contract for the first time in nearly 41 years, while the outlook for inflation remains uncertain, Reserve Bank of India’s (RBI’s) assessment of the economic situation showed on Friday. RBI governor Shaktikanta Dassaid, “It is in the growth outlook that the MPC (monetary policy committee) judged the risks to be gravest.
The combined impact of demand compression and supply disruption will depress economic activity in the first half of the year. Assuming economic activity gets restored in a phased manner, especially in second half of this year, and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in second half of 2020-21.”
“Nonetheless, downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing/lockdowns. Given all these uncertainties, GDP growth in 2020-21is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21onward,” said Das. If the contraction as forecast by the RBI and also by other economists is realised, it will be the first contraction for Asia’s third-largest economy since 1979-80, when GDP growth shrank 5.2%.
Several investment banks, brokerages and economists have predicted the economic growth to remain flat or contract in the range of 1.5% to 6.8%. IMF’s April estimate, however, showed that India and China will be the only countries to display growth, while the rest will contract. Das said domestic economic activity has been impacted severely by the lockdown.
The top six industrialised states, that account for about 60% of the industrial output, are largely in red or orange zones. High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments, he said, adding that the robust farm sector and predictions of healthy monsoon rains augured well for the rural economy.
The RBI governor also highlighted the precarious condition of the global economy, saying that by all counts, the macroeconomic and financial conditions are austere. The global economy is inexorably headed into recession, he said. Das said MPC assessed that the inflation outlook is highly uncertain. “The supply shock to food prices in April may show persistence over the next few months, depending upon the state of lockdown and the time taken to restore supply chains after relaxation.” “Much will depend on shape of the recovery after Covid.
Accordingly, MPC is of the view that headline inflation may remain firm in first half of 2020-21, but should ease in the second half, aided also by favourable base effects. By Q3 and Q4 of FY20-21, it is expected to fall below target. Thus, the MPC’s forward guidance on inflation is directional rather than in terms of levels.”