The Indian economy likely entered into a technical recession for the first time in history at the end of the first half of 2020-21, according to the Reserve Bank of India.
After an unprecedented decline of 23.9 per cent in GDP in April-June as estimated by the National Statistical Office on August 31, the central bank has ‘nowcast’ that Gross Domestic Product (GDP) for July-September quarter is set for a contraction of 8.6 per cent.
The NSO estimates for the second quarter expected at the end of November 2020 will formally bear out the extent of improvement that occurred in the quarter gone by, the RBI said in a ‘State of the Economy’ report.
In economics, when the GDP growth rate is negative for two consecutive quarters or more, it is termed recession. ‘Nowcasting’ is the prediction of the present or the very near future of the state of the economy.
The RBI, however, said the economy will break out of contraction of the six months gone by and return to positive growth in the October-December quarter of 2020-21. Incoming data for the month of October 2020 have brightened prospects and stirred up consumer and business confidence, it said.
“With the momentum of September having been sustained, there is optimism that the revival of economic activity is stronger than the mere satiation of pent-up demand released by unlocks and the rebuilding of inventories. If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in the third quarter (Q3) of 2020-21,” it said.
The central bank cautioned about the formidable downside risks – especially inflation — confronting the prospects of the recovery. “The foremost (risk) is the unrelenting pressure of inflation, with no signs of waning in spite of supply management measures such as the imposition of stock limits on onion traders, imports of potatoes and onions (without fumigation) and a temporary reduction in import duties on pulses,” it said in the report.
The second major risk to the economy stems from the global economy now at risk from the second wave of Covid-19. Should external demand collapse again as commodity prices seem to foretell, the recent recovery in exports could become stillborn, the RBI said.
Lurking around the corner is the third major risk – stress intensifying among households and corporations that has been delayed but not mitigated, and could spill over into the financial sector. “If the green shoots manage to survive these risks and take root, the key question is what will be the drivers of the recovery? We live in challenging times,” it said.
On the Covid-19 pandemic, according to the RBI, contrary to global developments, there are growing signs of the receding of the health crisis in India and this has provided confidence and courage to people to emerge out of containment and engage in economic activity within norms of social distancing, masks and sanitisation. Since mid-September, India has been bending the COVID curve, it said.
RISKS TO RECOVERY
Unrelenting pressure of inflation despite imports
Second Covid-19 wave hurting global growth
Intensifying stress amongst households, corporates