India Posts Worst GDP Slump of

Major Economies as Virus Spikes

Vrishti Beniwal

Auto rickshaws sit parked on a street in New Delhi on Aug. 31. Photographer: Anindito Mukherjee/Bloomberg

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ARTICLE India’s economy posted the biggest contraction
among major economies last quarter, with a recent
surge in coronavirus infections weighing on the outlook for any recovery.

Gross domestic product shrank 23.9% in the three months to June from a
year earlier, the Statistics Ministry said in a report Monday. That’s the
sharpest decline since the nation started publishing quarterly figures in
1996, and was worse than any of the world’s biggest economies tracked
by Bloomberg. The median estimate in a survey of economists was for an
18% contraction.​

​Once the world’s fastest-growing major economy, India is now on track

for its first full-year contraction in more than four decades. While there
are early signs that activity began picking up this quarter as lockdown
restrictions were eased, the recovery is uncertain as India is quickly
becoming the global epicenter for virus infections.

Read More: India on Course to Top Brazil on Unrelenting Surge in

Infections

India reported more than 78,000 new infections on Sunday, the most by
any country, with total cases nearing 4 million in a nation of 1.3 billion.
That could delay the consumption-driven economy from fully reopening.

“While the start of the July-September quarter has likely benefited from
a post-lockdown boost, those gains are already at risk of being lost amid
the ongoing pandemic and New Delhi’s hesitance to open the fiscal taps,”
said Priyanka Kishore, head of India and Southeast Asia economics at
Oxford Economics Ltd. in Singapore.

Plunging Output

The yield on India’s 10-year government bonds fell three basis points to
6.12% ahead of the data, with the securities capping their worst monthly
decline in more than two years. The rupee weakened 0.3% to 73.62 per
U.S. dollar.

Details of the GDP report:

Financial services -- the biggest component of India’s dominant

services sector -- shrank 5.3% last quarter from a year ago.
Trade, hotels, transport and communication declined 47%
Manufacturing shrank 39.3%, while construction contracted 50.3%
Mining output fell 23.3%, and electricity and gas dropped 7%
Agriculture was the lone bright spot, growing at 3.4%

A mix of monetary and fiscal measures so far to prop up the economy

won’t prevent it from sliding into recession. The government has
provided only limited fiscal support given constraints on revenue growth,
while the central bank has cut interest rates by 115 basis points so far
this year, boosted liquidity and transferred billions of rupees in dividends
to the state.

Related: RBI Adds Cash, Spurs Banks’ Bond Buying After India Yields
Surge

A separate report on Monday showed the government already breached

its full-year budget deficit target in the first four months of the fiscal year
that began April 1 as revenue receipts collapsed.

What Bloomberg’s Economists Say

The result is likely to jolt the government’s fiscal conservationist

mindset, which has announced expenditure cuts and argued that
available fiscal space should be utilized only once the virus is brought
under control. With new cases still surging, we believe the longer the
government delays an increase in fiscal spending, the deeper the
scars will be.

-- Abhishek Gupta, India economist

Click here to read the full report.

Krishnamurthy Subramanian, the government’s chief economic adviser,

said the quarterly slump was largely expected and due to an “exogenous
shock that has been felt globally.” The economy is “experiencing a V-
shaped recovery” after the lockdown eased, he said in comments
distributed to reporters, adding “we should expect better performance in
subsequent quarters.”

The statistics office said it relied on alternative indicators such as indirect

tax collections and interactions with professional bodies in the absence
of field surveys during the lockdown last quarter. The data will likely
undergo revisions as more information becomes available going forward,
it said in a statement.

Banking Woes
​Even before the pandemic struck, Asia’s third-largest economy was in the
midst of a slowdown as a crisis in the shadow bank sector hurt new loans
and took a toll on consumption, which accounts for some 60% of India’s
GDP. The lockdown from mid-March to contain the pandemic brought
activity to a virtual halt as businesses shut down and millions of workers
fled the cities for their rural homes.

The pandemic has caused historic GDP contractions in economies

around the world. In India, the situation is made worse by an acceleration
in virus cases, more recently in rural areas where the bulk of the
population live.

Looking Down

India's GDP contraction is among the deepest among large economies

Source: Bloomberg

The economy will probably shrink 5.6% in the year to March, according to
a separate Bloomberg survey published ahead of the quarterly numbers.

The gloomy outlook puts pressure on authorities to deliver more

stimulus, but there’s limited room to act. The government is facing a
budget deficit of more than 7% of GDP this fiscal year, more than double
its original target, while inflation is above the central bank’s 2%-6% goal,
reducing the chances of more rate cuts.

Even so, Reserve Bank of India Governor Shaktikanta Das told the
Financial Times that the government is set to announce more growth-
supporting measures and inflation will likely ease.

Read: India RBI Chief Expects More Steps From Govt to Boost Growth

Some economists expect growth to rebound to above 7% next year,

mostly led by pent-up domestic demand, and a pickup in farming and
exports. Yet, that’s likely to fall short of the recovery that followed the
global financial crisis more than a decade ago, when growth averaged
8.2% in the two fiscal years after the crisis, boosted by massive fiscal
spending, monetary easing and a swift global rebound.

“Growth recovery will also be hinged to the curb of the Covid spread and
removal of even localized lockdowns,” said Suvodeep Rakshit, senior
economist at Kotak Institutional Equities in Mumbai. “The choice for the
government will be on whether the consumption or the investment side
needs to be pushed.”

— With assistance by Tomoko Sato, Ashutosh Joshi, and Ravil Shirodkar

(Updates with comments from statistics office.)

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