In its latest monthly bulletin — for November — the Reserve Bank of India has dedicated a chapter on the “State of the economy”, aiming to provide a monthly snapshot of some of the key indicators of Indian economic health. By doing so, a hallowed tradition that began with the first issue of the Bulletin in January 1947, but interrupted during the period 1995 to date, will be revived, the bulletin informed.
As part of the exercise, the RBI has started the nowcasting or prediction of the present or the very near future state of the economy. The first nowcast predicts that the Indian economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.
While this pace of contraction is considerably slower than the 23.9% decline in the real gross domestic product (GDP) during the first quarter (April, May, June), the contraction of the second quarter is crucial because it implies India that has entered a “technical recession” in the first half of 2020-21, for the first time in its history.
India has plunged into recession for the first time in nearly a quarter of a century as the pandemic continues to weigh heavily on Asia’s third-biggest economy, which economists warn will struggle to recover from the slump.
Official data published on November 27 showed gross domestic product for the July-September quarter fell by 7.5 percent compared to the same period last year. Last year India’s economy was growing by more than 4 percent.
That follows a record drop of nearly 24percent in GDP in the April-June period, the first quarter of India’s fiscal year.
The Indian Ministry of Statistics earlier had informed that restrictions imposed on economic activities were not deemed essential during the first quarter. The Indian government had restricted to contain the spread of the Covid-19 pandemic. Though the restrictions have been gradually lifted, there has been an impact on economic activities.
While manufacturing returned to growth, the services sector suffered a second consecutive double-digit decline in India. The Indian government’s consumption also fell sharply because of an inadequate fiscal response to the crisis.
Economists suggest that India’s economy has a difficult path ahead. They inform that the absence of a comprehensive fiscal response will hamper growth in the future.
Monetary policy, under the circumstances, is likely to remain loose for the foreseeable future in India. Economists suggest markets are too hawkish in expecting modest rate hikes in 2022.
The GDP data highlights the contrasting fortunes of India and China in the wake of the pandemic.
While much of the world continued to struggle with the virus, China’s recovery accelerated in the most recent quarter. The country enforced stringent lockdown and population tracking policies intended to contain the virus and set aside hundreds of billions of dollars for major infrastructure projects to fuel economic growth. It may be the only major economy to end the year bigger than it started.
Indian Prime Minister Narendra Modi dreamed of making India’s economy worth USD500 billion by 2025.
India’s economy, which grew by 8 percent a few years ago, was declining just before the outbreak of Covid-19. India’s trade, hotel, and transport sectors have shrunk by 47 percent as consumer spending, private investment, and imports have been adversely affected by the Covid-19. Even the construction industry has shrunk by about 40 percent.