India’s Fourth Recession Since Independence May Be Its Worst, Says Crisil
Crisil expects real gross domestic product to contract by 5% in FY21.
The Indian economy is headed for its fourth recession since independence, which may also prove to be its worst. That’s according to a report put out by Crisil Research on Tuesday.
Crisil expects real gross domestic product to contract by 5% in FY21, in line with forecasts put out by economists at Goldman Sachs, Nomura, Kotak Institutional Equities and others. The first quarter will suffer a staggering 25% contraction, Crisil said.
In addition, Crisil forecasts a 10% “permanent loss of GDP” as, over the next three years, India is unlikely to move back up to the levels of GDP that would have been achieved under pre-Covid growth scenarios.
India’s Fourth Recession
Crisil ’s forecast of a 5% contraction follows its earlier estimate of 1.8% growth, put out on April 28.
Things have only gone downhill since, DK Joshi, chief economist at the agency, wrote in a report. “While we expect non-agricultural GDP to contract 6%, agriculture could cushion the blow by growing at 2.5%.”
According to Crisil data, India has faced a recession only thrice in the past 69 years—in fiscals 1958, 1966 and 1980. In each of those instances, the recession was brought on by a monsoon shock that hit agriculture, then a sizeable part of the economy.
The recession staring at us today is different. For one, agriculture could soften the blow this time by growing near its trend rate, assuming a normal monsoon. Two, the pandemic-induced lockdowns have affected most non-agriculture sectors. And three, the global disruption has upended whatever opportunities India had on the exports front.DK Joshi, Chief Economist, Crisil
Despite relative easing of restrictions in the latest phase of the lockdown, economic activity continues to be disrupted.
A rough estimate based on a sample of eight states, which contribute over half of India’s GDP, shows that their ‘red zones’ contributed about 42% to the state GDP on average. On average, the orange zones contribute about 46%, while the green zones contribute only about 12% to state GDP. This could be broadly indicative of the scenario at an all-India level.
In addition, the government’s recently announced economic package has some short-term measures to cushion the economy but is mostly focused on medium-term reforms. Crisil estimates the fiscal cost of this package at 1.2% of GDP.
As such, the negative impact on GDP is expected to massively outweigh the benefits from mild fiscal support and low crude oil prices, especially in the April-June quarter. “Consequently, we expect the current quarter’s GDP to shrink 25% on-year,” Joshi wrote.
‘10% Permanent Loss Of GDP’
Crisil also cautions that India will face a 10% “permanent loss of GDP.” It defines this as the gap between the likely level of GDP which would have been achieved at pre-Covid growth trends and what it will likely end up at at post-Covid growth trends. It assesses this gap over a three-year period.
“We believe a catch-up to the pre-crisis trend level of GDP will not be possible in the next three fiscals despite policy support. Under the base case, we estimate a 10% permanent loss to real GDP (from the decadal-trend level), assuming average growth of about 7% between fiscals 2022 and 2024,” Joshi said.
Crisil noted that after the global financial crisis, a sharp growth spurt helped India catch up with the trend within two years. Massive fiscal spending, monetary easing and swift global recovery played a role in a V-shaped recovery. “To catch-up would require average GDP growth to surge to 11% over the next three fiscals, something that has never happened before.”
