News analysis

Indian economy in trouble as pandemic disruptions continue

The Indian economy, which contracted by 23.9 per cent in the first quarter of its financial year on the back of a stringent coronavirus lockdown that led to job losses and drove down consumption, is in even bigger trouble, as the latest growth figures show.

On Monday, government data revealed that the Indian economy is performing at its worst since 1996, when the country first started publishing quarterly gross domestic product (GDP) figures.

Additional data for the first quarter ended June 30 revealed that manufacturing had contracted by 39 per cent, construction by 50.3 per cent and the trade, hotel, transport and communication segments by 47 per cent.

A rare positive was agriculture, forestry and fishing, which inched up 0.4 per cent to 3.4 per cent.

According to credit ratings agency Care Ratings, India is behind only Peru and Macau in experiencing the severest contraction out of the 54 territories that have reported GDP figures for April to June.

The prediction by analysts is that India, once seen as a global economic driver, will continue to lag behind other economies.

DBS Bank economist Radhika Rao said: "Consumption weakness in the current cycle stems from weaker disposable incomes and uncertainty over employment prospects, rather than changes in the rate cycle.

"This requires a larger fiscal push, which carries a greater multiplier for growth but meets constrained headroom due to anaemic revenue collections."

She predicts a stimulus push later in the year which may include a short-term boost for consumption, including cash transfers, and a medium-term push towards investments.

India was already facing headwinds, with growth touching a six-year low of 4.7 per cent in the October to December 2019 quarter.

In March, the federal government imposed a stringent countrywide lockdown, bringing economic activity to a complete halt. Hundreds of migrant workers lost their jobs, demand dropped and businesses and industry were shut.

It has since eased the lockdown in stages, with metro train services being allowed to resume operations in the latest loosening of restrictions.

 
 

The government had in March announced a 1.7 trillion rupee (S$31.7 billion) financial package, involving direct cash transfers and free food, and in May introduced a 20 trillion rupee economic package, including collateral-free loans for small businesses.

But resumption of economic activity has been hit as state governments continue to implement mini-lockdowns to curb infections within their borders.

The federal government, keen to push economic growth, has said state governments cannot impose lockdowns without federal consent, even as India remains among the three worst-hit countries, with 3.77 million cases.

Still, government officials remain optimistic.

Mr Krishnamurthy Subramanian, chief economic adviser to the Indian government, said the country is seeing a V-shaped recovery, in which the economy goes through a brief period of economic decline followed by a strong recovery. "India was in a lockdown all through the April to June quarter with the majority of economic activities being restricted. So this trend is along expected lines," he said in a statement on the slowing growth.

According to a report titled City Of Dreams No More, published on Tuesday by the London School of Economics' Centre for Economic Performance, 52 per cent of urban workers in India went at least a month without work, pay or any financial assistance during the lockdown.

The World Bank said the Covid-19 pandemic is pushing millions of Indians into poverty, with half of the population vulnerable due to income and job losses.

Professor Biswajit Dhar of Jawaharlal Nehru University said all the growth drivers necessary for any kind of recovery in the ensuing quarters seem to be missing. "You don't have customer demand and then you don't have investment, which is falling, and then exports are depressed, obviously, because of the global situation," he said.

 
 

And many believe that until India gets the pandemic under control, economic recovery will remain problematic.

India last week reported 500,000 new Covid-19 cases, the most of any country, said the World Health Organisation.

A version of this article appeared in the print edition of The Straits Times on September 03, 2020, with the headline 'Indian economy in trouble as pandemic disruptions continue'. Print Edition | Subscribe