Business

India Headed For Rare Quarterly Contraction In GDP, A First In 2 Decades

India Headed For Rare Quarterly Contraction In GDP, A First In 2 Decades

Nirmala Sitharaman has promised measures "sooner than later" to support the economy

India's economy is poised to shrink next quarter and full-year expansion set to suffer markedly, as a three-week nationwide lockdown starting Wednesday brings activity to a standstill, according to economists including from ING Groep NV and Deutsche Bank AG.

With two of the three-week shutdown falling in April, gross domestic product growth in the quarter to June could contract about 5 per cent, Prakash Sakpal, an economist at ING in Singapore, wrote in a note. The economy, which expanded 4.7 per cent in the quarter ended December, hasn't seen a contraction in at least two decades. India's economy had contracted 5.2 per cent on an annual basis in 1980.

"The biggest whammy will be to private consumption, which accounts for 57 per cent of India's GDP," Mr Sakpal said. "With all non-essential consumption dropping virtually to zero for a week in the current quarter means year-on-year GDP growth plunges to just about 1 per cent," he wrote.

That's prompted ING to cut its growth forecast for the next financial year starting April 1 to 0.5 per cent from 4.8 per cent -- That's a far cry from the government's expectation of 6 per cent-6.5 per cent expansion.

Deutsche Bank's Chief India Economist Kaushik Das expects real GDP growth to collapse in April-June to a negative print of 5 per cent year-on-year or more, going by China's experience.

"We don't rule out a possibility of negative real GDP growth in July-September as well," Das said, adding "it will take time to re-start economic activities and push the economy back to a pre-lockdown stage."

Other assessments were less severe. Rahul Bajoria, a senior economist at Barclays Plc in Mumbai, sees an about two percentage point hit to output, which will trim the calendar 2020 GDP forecast to 2.5 per cent from 4.5 per cent earlier, and fiscal year 2021 projection to 3.5 per cent from 5.2 per cent previously.

"We estimate that the cumulative shutdown costs will be around $120 billion or 4 per cent of GDP," said Rahul Bajoria, a senior economist at Barclays Plc in Mumbai. Of that, the new shutdown assumptions account for roughly $90 billion of additional impact, he added.

A median survey of economists by Bloomberg forecast April to June growth at 2.7 per cent, while the full-year expansion was pegged at 4.3 per cent.

Unlike other large economies, India has so far desisted from announcing any major policy initiatives to support growth -- either through interest rate reduction or easing of fiscal purse strings, although Finance Minister Nirmala Sitharaman has promised measures "sooner than later" to support the economy amid the coronavirus pandemic.

The central bank's monetary policy committee is scheduled to meet between March 31 and April 3 and the six-member panel is expected to cut interest rates.