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New Delhi: The Modi government’s decision to extend the lockdown until 17 May has put the economy on the path to a contraction, many economists have forecast. 

The lockdown has brought manufacturing and services to a grinding halt, prompting many to predict that the Indian economy will either remain stagnant or may contract by more than 2 per cent in 2020-21.  Both these sectors contribute over 80 per cent of India’s Gross Domestic Product (GDP).  

The growth forecasts for India have been revised downwards by around 2-3 percentage points in the last one week after the government announced that the lockdown will be extended beyond 3 May, albeit with certain relaxations.

The initial growth projections for India by financial institutions and brokerages for 2020-21 were at around 5-6.5 per cent but with the Covid-19 pandemic, these numbers have seen a constant downward revision. Prior to the announcement of the third lockdown, most of the projections expected India to grow marginally at around 1-2 per cent.

While the government announced easing of some restrictions effective 4 May, the industry is of the view that manufacturing activity will not resume due to the curbs placed on red zones or areas that are still reporting new cases regularly. These zones contribute more than 50 per cent to the GDP. 

Industrial hubs in Delhi, Maharashtra, Gujarat, Uttar Pradesh and Tamil Nadu have been some of the worst hit leading to a halt in production. 

Also read: Fiscal slippage imminent as govt to borrow additional Rs 4.2 lakh crore in 2020-21

A constant downward revision 

The growth forecast for India has seen a constant downward revision since India announced a lockdown beginning 25 March and subsequently extended it.  

Credit ratings agency Moody’s on Friday forecast that the Indian economy will grow at zero per cent in 2020-21 pointing out that growth concerns will weigh until the second half of 2020-21. 

“The quality of India’s economic growth has declined in recent years, demonstrated by financial stress among rural households, relatively low productivity and weak job creation,” it said. “Financial stress among NBFIs has also contributed to tighter retail lending and weaker consumption. The economic shock from the coronavirus outbreak will exacerbate these challenges and weigh significantly on growth until at least the second half of 2020.” 

Standard Chartered Bank, in a note last Monday, said the extension of the lockdown until 17 May will be a “significant drag on growth”. 

While revising its GDP growth forecast for 2020-21 to -2 per cent from the earlier projection of 0.7 per cent, the note said that the top 10 states, which contribute 70 per cent of India’s GDP, have 35 per cent of their districts categorised as ‘red zones’ where lockdown relaxations don’t apply.  

“Given that industrialised states have a high proportion of red zones, and their infection rates have yet to show signs of deceleration, economic activity is likely to resume at a very gradual pace even after 17 May,” the note said. “Against this backdrop, we now believe economic activity will take much longer to return to normal levels.” 

The note, authored by Anubhuti Sahay, Head, South Asia Economic Research (India) at Standard Chartered, added that in Q1 of 2020-21, GDP is likely to contract by 22 per cent. 

Also read: Rural economy showing positive signs, but lockdown must be lifted for recovery: SBI chairman

Shortage of labour will worsen situation

According to Devendra Pant, chief economist at India Ratings and Research, supply chain disturbances and labour-related issues could exacerbate the situation.   

“More than the lockdown, manufacturing growth would depend on how quickly supply chain disturbances are resolved. It would largely depend on labour-related issues also,” Pant said. “If migrant labourers are not back, the production process will be hit and it will impact manufacturing growth. In all likelihood, manufacturing in FY21 is likely to contract. If normalcy is not restored quickly, it can contract by even more than 7 per cent in FY 21.” 

India Ratings has estimated that India’s GDP growth will be between 1.9 per cent and -2.1 per cent. The -2.1 per cent contraction is forecast “if the lockdown continues beyond mid May 2020 and a gradual recovery takes root only from end-June 2020”. 

Ratings agency ICRA Ltd also expects the economy to contract by 1-2 per cent in 2020-21. 

“While the graded relaxations announced by the government will permit the resumption of economic activity, the relatively stringent norms in major urban centres will result in the pace of activity remaining constrained,” the ICRA said. “Given the likelihood of mismatches in labour availability as well as the possibility of supply chain disruptions, we now expect the drag from sectors such as manufacturing, construction, and trade, hotels and transport etc. to linger for a large part of May 2020, with a further delay in the return to normalcy for a large cross-segment of these sectors.”

Also read: Modi govt must spend what is needed, shouldn’t be constrained by monetisation fears: Rajan


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