SINGAPORE – India’s economy is expected to improve in the quarter ending in September, compared to a record decline in the previous three months. Nevertheless, analysts say it will be a long road to recovery.
Gross domestic product for the period July-September – India’s fiscal second quarter – will be released on Friday. The South Asian country’s fiscal year begins in April and ends in March the following year.
Economists polled by Reuters predicted that India’s economy shrank by 8.8% in the quarter ending in September. They expect GDP to decline in the October to December quarter as well, followed by a 0.5% expansion from January to March.
If Friday’s GDP print indicates a contraction, as widely expected, it will put India in a technical slowdown – defined as two consecutive quarters.
JP Morgan’s leading emerging markets economist Jahangir Aziz said the investment bank is far more optimistic than consensus estimates for India’s second-quarter GDP print.
“We think it’s between 7.5% and 8% (contraction),” he said on CNBC’s “Squawk Box Asia” on Friday. He points out that higher frequency data indicated that the economy is slightly better than the 8.8% decline that economists are expecting.
“It is an improvement, but it is a very long distance to go towards full recovery or even to try to recover the lost development in the last six months,” Aziz said.
India’s economy was already facing challenges with consumer demand and the banking sector faced difficulties for a long time as the coronovirus epidemic struck. The country went into national lockdown between late March and May in an attempt to slow the spread of the virus in the country.
This inevitably led to a decline in private consumption and investment demand, leading to significant job and income losses that created uncertainties and further reduced spending.
On July 20, 2020, a man sits in front of a closed retail shop in a street during a lockout to prevent the increase of Kovid-19 coronovirus cases in Bangalore.
Manjunath Kiran | AFP | Getty Images
Kunal Kumar Kundu, India’s economist at Société Générale, said, “With most countries mixing fiscal and monetary policy, India’s response was largely monetary and only slightly fiscal.”
India announced several policy measures in recent months, including a package of around $ 10 billion in October to boost the economy, but economists were largely unaffected.
Aziz of JP Morgan said that all policy makers, including people from other countries, are watching whether this epidemic will leave a lasting mark on their economies. He said that by the end of 2021, with India’s current trajectory, South Asia’s largest economy would still be far from where it could have been if the epidemic had not occurred.
Aziz said, “There is a fear of permanent fear, I think almost all the policemen have been kept awake at night.” “In this instance, India’s rather frugal fiscal support, I think, could play a big role in creating that lasting mark that should have been even deeper.”
‘Difficult’ road to recovery
Kundu states in a note that the lockdown has failed to ease the transition curve as a result of “insufficient fiscal response”. He also said that those measures could reduce the possibility of economic recovery as only a few of them are expected to have a positive impact.
He said that he is looking forward to an uneven recovery path. Some businesses and sectors will be strong but the rest – including most micro, small and medium businesses in the informal sector – will also struggle in the medium term.
“In absolute terms, we are quite busy with the macro conditions of India in the short and medium term, although we are more creative on the long-term prospects,” Kundu wrote.
In relative terms, “India can still emerge as one of the fastest growing economies despite weak growth potential,” he said.
The Reserve Bank of India said in its monetary policy statement last month that certain categories of services, such as manufacturing, particularly consumer non-durables, and passenger vehicles and railway freight, have gradually recovered in the second quarter, reflecting government spending and rural Are affected by demand. According to the central bank, the outlook for agriculture was strong.
Nevertheless, some economists believe that the recovery is likely to reduce the suggested recovery by the industrial sector for several reasons.
Loveless Venkateswaran, an economist at Mujaho Bank, said, “While it is easy to resume supply-side production, the demand situation is slow to bring back the epidemic.” The Department of Asia and Oceania Treasury said in a Friday note.
“Second, the inability to contain the outbreak also means that the domestic service sector is somewhat of a hindrance to the normalization process,” she said.
India’s gray economy was also hit by an epidemic, which led to a decline in overall growth as the informal sector faced financial and cash-flow conflicts, Venkateswaran explained.
India has reported the second highest number of coronovirus infections in the world behind the United States. According to Johns Hopkins University statistics, the South Asian country Kovid-19 has more than 9.26 million cases. More than 135,000 people have died but the rate of recovery in India is relatively high.
Aziz of JPMorgan said he is worried that there may be a shortage of loans in development as banks may be hesitant to lend to homes and businesses that are highly profitable.
“My fear is that, again, the lack of income support coming from India, from the government, I think will harm the balance sheet of households, damage the balance sheet of (small and medium enterprises) and banks. It would be very difficult to be able to provide credit specifically for India’s growth, “he said, adding that it is going to be a” very tough ride “in 2021-2022.