India’s economy may have contracted by as much as a fourth in the June quarter because of the Covid-19 pandemic and the lockdown that ensued, according to a poll of 11 economists conducted by ET.

They warned that a recovery may take a while as the virus spreads and infection numbers rise, prompting further localised closures. Their contraction estimates ranged from 13.6% to 25.7% and are in line with those seen in other countries hit hard by the coronavirus.

The official gross domestic product (GDP) numbers for the first quarter will be released on August 31. The Indian economy grew 4.2% in FY20 and 3.1% in the quarter ended March 31, signaling that growth was already slowing before the pandemic took hold. June quarter growth in FY20 was 5.2%.

Even at the lower end of the range, the contraction will be historic, experts said. India needs to gain control over the outbreak to ensure that economic recovery is sustained, said most of the economists polled by ET, warning that local lockdowns were hurting the nascent recovery.

They called for more measures from the government to support growth. India’s nationwide lockdown began on March 25 and was eased in phases in May, leading to a revival in business activity in June.
But July saw states being forced to implement shutdowns in containment zones amid fresh outbreaks, denting the uptick.

“We need to have a structured approach to on-and-off lockdowns and have a comprehensive fiscal plan to help the states so that the states can get the desired confidence and mojo back! As of now, containing the virus in rural areas must be the top priority,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

He sees a 16.5% contraction in the June quarter but that’s an improvement over the previous estimate because of better-than-expected corporate results.

India has the highest number of fresh daily infections and is third highest in terms of cumulative cases in the world, behind the US and Brazil.

“The first quarter bore the most brunt of the stringent lockdown in response to the pandemic, which dealt a sudden stop to nearly three-fourths of the economy for at least two of the three months,” said Radhika Rao, India economist at DBS Bank, predicting a 16.6% contraction in the first quarter.

India Ratings sees a 13.6% contraction, the least in the poll. Chief economist DK Pant said no quarter in the fiscal year would see positive growth. Think tank National Council of Applied Economic Research (NCAER) forecast the steepest decline of 25.7%.

With a similar outlook of no positive growth this year, Sonal Verma, Nomura’s chief economist for India and Asia excluding Japan, pegged the first-quarter contraction at 15.2%.

The pandemic is spreading at a much faster rate after the opening up of the economy, Ghosh said separately in an SBI Research note, adding that mortality rates may increase by 0.5-3.5%.

Manufacturing and services bore the brunt of the pandemic in the quarter ended June. Government transfers, good monsoons and large procurement of foodgrains may help the farm sector grow. Industrial production shrank 35.9% in the quarter from a year ago compared with 3% growth in the corresponding period last year. Manufacturing shrank 40.7% in the quarter while some services were down 35%.

“For Q1, we are looking at -21%, with industry declining 32%. The saving grace is agriculture, which we have taken at a 4% growth,” said HDFC Bank chief economist Abheek Barua.

“Manufacturing was hit in April and May but recovered a little in June,” said Indranil Pan, chief economist at IDFC First Bank, pegging the quarterly contraction at 17%. “Certain services segments remain weak and will remain so going ahead.”

SHAKY RECOVERY

“Pent-up demand and inventory restocking buoyed sentiments and production levels soon after, helped by the gradual reopen,” said Rao.

High-frequency indicators such as the index of industrial production (IIP), fuel demand, mobility, and e-way bills improved on a monthly basis through the quarter but were still far below last year’s levels.

That bounce may not be sustained as consumption and purchasing power will continue to remain stressed as the virus penetrates rural areas, economists warned. Despite sequential improvements, the lockdown continued to plague the economy, according to Madan Sabnavis, chief economist at CARE Ratings.

“The fundamental problem remains that due to the lockdown, consumption is still down, jobs are not there and people do not have purchasing power,” he said.

Goods and services tax (GST) collections, e-way bills, power consumption and purchasing managers’ indices have already shown moderation in July from June levels. The return to normalcy has been hamstrung by varying restrictions across districts as the pandemic evolves and broadens its reach, said Rao.

Subdued consumption and investment levels will hold back a recovery in the second half of FY21, the economists said.

“The deep contraction is reflective of the impact of the global recession and the nationwide lockdown that restricted economic activity,” said Vivek Kumar, senior economist, Yes Bank, who expects an 18.5% contraction in first-quarter growth.

Barclays’ chief India economist Rahul Bajoria said there’s room for a small fiscal stimulus package to support demand as longer-term steps such as the agriculture infrastructure fund, several privatisation initiatives and healthcare infrastructure projects have little visibility.

Another option would be tax breaks to increase disposable income. “Government can offer income tax concessions for the lower two slabs and reduce GST even on sin commodities to build demand,” said IDFC’s Pan.

States should make clear the criteria by which localised shutdowns will be imposed to help with planning.

“Authorities should define a threshold of the number of cases beyond which a lockdown will be imposed,” said Sabnavis. “This will take care of some of the unpredictability in the current scenario and help businesses plan better.”