Minus Nine Now: The Fall From The Worst

The Fall From the Worst

In our May 26, 2020, GDP outlook, we said India’s worst recession in decades was at hand. Come September, and we foresee it contracting further by a rate not seen since the 1950s.

Growth Outlook for Fiscal 2021

CRISIL revises its real GDP growth forecast for India in fiscal 2021 to -9% from -5% projected in May. With the pandemic’s peak not yet in sight and the government not providing adequate direct fiscal support, the downside risks to our earlier forecast have materialised. If the pandemic were to peak out in September-October, GDP growth could move into mildly positive territory towards the end of this fiscal. Even in that event, manufacturing is expected to revive faster compared with services. But the risks to our outlook remain tilted to the downside till such time a vaccine is found and mass produced.

Permanent Scars

We expect a permanent loss of 13% of real GDP over the medium term. In nominal terms, this amounts to Rs 30 lakh crore*. This is much higher than a 3.0% permanent hit to GDP in Asia-Pacific economies (ex-China and India) over the medium run estimated by S&P Global in June1. Catch-up with the pre-pandemic trend value of real GDP would require average real GDP growth to surge to 13% annually for the next three fiscals – a feat never before accomplished by India

The Viral Drag

The number of confirmed Covid-19 cases have crossed 42 lakh as on September 7 and India continues to be the largest contributor to the daily global tally.

− The overall caseload still remains concentrated in states which have a major share in India’s GDP: Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh together account for ~54% of India’s total confirmed cases as on September 7, and ~36% of India’s GDP

− The pandemic is now rapidly spreading from metropolitan to smaller cities and rural areas. Of all the districts with 1,000+ cases, almost half were rural as on August 31, up from 20% in June

− The stringency of lockdown (as per the Oxford Stringency Index) has reduced from its April-May level as the Indian government started opening up economic activities. But the index has broadly plateaued since June as there has been back and forth on containment measures, with regions facing faster spread reintroducing restrictions and others relaxing them

Second-Quarter GDP Growth Expectation

High- frequency indicators, both conventional and unconventional (such as Google’s Community Mobility Reports), correlate reasonably well with GDP estimates. In the April-June quarter, GDP contracted 23.9% (against our forecast of 25%), but that did not come as a surprise as these indicators were indicating a deep hit. But thereafter, till August end, they showed recovery from April levels, yet remained below pre-pandemic levels, implying the economic contraction continued, albeit less severely than in the first quarter. Hence, we expect GDP to contract 12% on-year in the second quarter of fiscal 2021

How Robust is the Rural Economy?

− We expect agricultural GDP to grow 2.5% on-year this fiscal, given normal and a largely well- distributed monsoon, and healthy sowing and ground water situation. While agriculture does not have the heft to offset the sharp contraction in non-agricultural sector (accounting for 85% of GDP), it punches more than its weight in GDP – its share in employment remains the highest at 44% and is a critical supplier of much-needed nutrition during the pandemic

− The non-agriculture economy represents two- thirds of the rural economy, and though affected by the pandemic, appears to have held up better than its urban counterpart. This is reflected in demand for products with rural footprint such as tractors, motorcycles and fast moving consumer goods. But rural wages remain depressed and remittances are likely to have been hit due to reverse-migration. Moreover, the pandemic’s rapid spread to rural areas could mean an increase in restrictions on activity there, which could challenge the rural story.

Investments on a Weaker Wicket than Consumption

Despite some support from the rural economy, consumption is expected to sink this fiscal. Consumption of some services, especially contact-based ones such as travel, sports and entertainment, will remain muted till a vaccine is widely available. The coterminous rise in retail inflation would further reduce disposable incomes of people. Low consumer confidence and rise in precautionary savings of households too will keep consumption suppressed. An uncertain environment, low capacity utilisation (expected to fall further) and deleveraging by corporates will pull down private corporate investment. To boot, the axe of fiscal stress seems to be falling on public investments – more for states than the Centre. In short, investment recovery looks distant.

Financial Conditions

Pre-existing tightness in financial conditions magnified quickly when the pandemic struck – as a result of both, a spillover of global conditions and rising risks to domestic economy. Since June, financial conditions have eased due to favourable actions by central banks both at home and abroad.

− However, easing has not been uniform and bank credit will remain weak this fiscal. The spreads of lower-rated corporate bonds (such as AA paper) remain much higher than long-term averages. This constrains the ability of the financial sector to lubricate the real economy

− G-sec yields are fundamentally under pressure on account of high government borrowing needs (of Centre and states) this year. While the Reserve Bank of India’s (RBI’s) policy easing and ‘Operation Twist’ have capped the rise in yields, the pressures are likely to resurface once RBI support wanes

The Medium-Term Outlook

• The medium term growth path for India is likely to trend down. In the base case, we see growth shooting to 10% in fiscal 2022, on the back of a very weak base and some benefit from the rising-global- tide-lifting-all-boats effect. Even with that, real GDP will only merely catch up to fiscal 2020 level by fiscal 2022. Beyond that, we see growth averaging ~6.2% annually over the next three years (that is, between fiscals 2023 and 2025)

• With capital and labour constrained by their own set of challenges, the push will have to come from efficiency improvements. For this, economic reforms are critical. These need to be relentlessly pursued to create an upside to medium-term growth, and over time

• The truth with reforms is that you bite the bullet first and reap the benefits later. The government needs to take more steps to address the current pain in the economy. It should stretch itself fiscally to support vulnerable households and small business that have been hit hard by pandemic. This will also help preserve productive capacity in the economy and together with reforms can create a sustainable push to growth over the medium run