As the Covid-19 pandemic continues to cripple economies around the world, the International Monetary Fund (IMF), in its June 2020 World Economic Outlook Update unveiled a few days ago, has revised India’s economic growth forecast sharply downward. It now expects the Indian economy to contract by as much as 4.5% in 2020 which IMF’s economic counsellor and director of research Gita Gopinath calls a “historic low”. However, IMF projects India’s growth to bounce back sharply to a robust 6% in 2021.
The cumulative loss to the global economy over 2020-21 has been pegged at $12 trillion by the IMF, which sees global output declining by 4.9% in 2020, a downward revision of 1.9 percentage points from its April 2020 forecast. Advanced economies, according to IMF, will contract much more, by 8%, compared to emerging markets and developing economies (where India figures), which will contract by 3% in 2020 before recovering to clock 5.9% growth in 2021.
IMF’s projections, of course, have been made with a good degree of caution, with the Fund making it clear that these forecasts come with a high degree of uncertainty, both on the upside and on the downside. “On the upside, better news on vaccines and treatments, and additional policy support can lead to a quicker resumption of economic activity. On the downside, further waves of infections can reverse increased mobility and spending, and rapidly tighten financial conditions, triggering debt distress. Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12%,” IMF says.
As the Indian economy moves firmly into unlock mode despite the sharply rising numbers of Covid cases on a daily basis, the downward revision in growth figures and the estimate of a strong upturn to 6% in 2021 appear to have economists divided. While the longer-than-expected lockdown in India and the “slower recovery” in April seem to have prompted IMF’s assessment, economists are unwilling to stick their necks out on how deep the contraction will be, and how quickly the economy will recover, given the multiple factors at play.
The drift towards a sharper downturn, economists tell me, isn’t a surprise, and one reason clearly is the fact that advanced economies are in deeper trouble. This means India’s export destinations are far from being in good health. “The lockdown has had a disproportionate impact on the economy but there was really no option and that was the only medicine,” a leading economist tells me. Even the most advanced economies with power to spend their way out of trouble have failed to bring the situation under control and are grappling with the prospect of a crippling downturn. India, with limited fiscal space to play around with, is finding it even more difficult to push through major stimulus packages despite the government’s multiple attempts to alleviate the problems of migrant labour, the farm sector, and micro, small and medium enterprises (MSMEs). A section of economists believe that with the situation unfolding rapidly every day, and with limited information available on the exact nature of the virus and its impact, putting out forecasts on the economic impact on India will be tough both for the medium term and the long term.
“People are still learning about the implications. We are in uncharted territory, in the infancy stages, and we will have to keep revising our expectations and forecasts both ways as the information comes in,” an economist tells me. Given that a vaccine is still some time away, estimates will have to be carefully put out.
Even so, some have given it a shot. Suman Chowdhury, chief analytical officer at Acuité Ratings says his firm believes the economy will recover steadily over the next few quarters. It has currently pegged the GDP contraction for FY21 between 1.5%-2.5%, but expectedly cautions that there are downside risks to these estimates if the expected demand recovery takes longer. “Given the base effect, there is however, a strong case for a healthy GDP growth print beyond 6% in FY22,” he says.
A slow, painful recovery
IMF’s Gopinath also says it will be a “deep downturn in 2020 and a sluggish turnaround in 2021.” India’s recovery will also likely be slow, painful and fraught with a lot of uncertainties. While the government has attempted to put together a reform package under the Atmanirbhar Bharat umbrella, there is hope that beyond the efforts already made, there will be another stimulus shot in the coming days. This has been further fuelled after finance minister Nirmala Sitharaman said recently that the government and the Reserve Bank of India (RBI) were in talks over a possible one-time loan restructuring effort for companies which were highly stressed owing to the pandemic. While the government has given sops for MSMEs as part of its earlier package, economists believe there will be little benefit to MSMEs if the bigger companies which source goods from them are in trouble. A package for stressed large companies, then, is necessary.
However, while providing a stimulus to the larger companies, the government will have to be extremely careful. Such a package has to be clearly directed to the right sectors for maximum impact, and hence has to be carefully crafted so that the benefits reach the right targets. It also needs to be remembered that the ability of banks to lubricate the economy to the extent they should has also been seriously impaired. Banks, already struggling under the load of earlier non-performing assets (NPAs), are turning risk averse with the fear that more loans may turn into NPAs once the moratorium is lifted.
Indranil Pan, chief economist at IDFC FIRST Bank, tells me he does not agree with IMF’s assumptions. “I am not sure what they were thinking in April [when they made their forecast of 1.9% growth for India for 2020]”, Pan tells me. “The 6% growth for 2021 assumes quite a sharp pickup which we at IDFC FIRST Bank aren’t seeing,” he adds. Pan’s estimates are of a contraction of 6.4% for FY2021 and a growth of 3% for FY22. Even with a base effect, Pan doesn’t see it being so strong as to propel the figure to IMF’s 6% or the 8% some rating agencies have forecast.
His thesis is that till recently the discussion has centred around the demand side. The supply side scenario, on the other hand, hasn’t emerged in the clearest way owing to interest moratoriums, asset reclassification delays and other moves. But once those are over, if global and domestic conditions don’t improve, then there will be a severe problem in restarting the cycle. “Our best case, therefore, is of 3% growth in FY22 at this point in time.” Some other economists also say that it is important to remove the “recency bias” and hence are unwilling to bet on the fact that India’s potential has already been damaged. They would rather wait and watch whether another stimulus comes from the government and take a call thereafter.
Recovery formula
The fact that the government has limited headroom is evidenced by the recent continuous hikes in fuel prices. This apart, the packages announced by the government so far have been carefully crafted to ensure minimum impact on the fisc, given that global ratings agencies are keeping a close watch on the government’s moves.
Pan reckons that the problem started a year ago when all assumptions on the fisc were robust. The expenditure cycle, in turn, was based on such robust assumptions. When growth was ticking it was still fine, but now, with vanishing revenues, any further expenditure would deeply impact the fisc. Besides, he reckons the government also wants India to be included in the global bond indices, and any further ratings downgrade would lead to those hopes being dashed and would also impact investments into India.
Are there sectors which could lead the recovery? Economists say manufacturing clearly will be better off, but the problem will be more acute in the services sector, where there is more requirement of face to face contact. That will take a longer time to return to normal. However, with greater adoption of digital, new activities dependent on digital delivery would come up, and it is also possible that the gig economy would revive. Healthcare will be one area which will be in demand. Some sectors would also pivot to provide services which are in demand. Examples of this would be how companies started producing personal protective equipment (PPEs) quickly, and how FMCG companies quickly began production of sanitisers. But even so, it is unlikely that these new areas would fill up the gaps left by sectors directly hit by the pandemic.
The return to normalcy would also be delayed by the migrant labour crisis. With lakhs of migrant labourers back to their homes in the wake of the pandemic, sectors like construction and real estate, which are dependent on them, would take a hit. Even if migrant workers understand that the employment opportunities in their hometowns are not to their liking and want to return, there will be a lag before that happens. Besides, with infections on the rise in major metros like Delhi and Mumbai, migrant labourers will also wait for the number of infections to decline before attempting to return to the cities.
The China factor
Even as the pandemic takes its toll, India’s border tension with China has emerged as a major worry for economists betting on a rapid recovery. Most economists believe that the India-China border skirmish couldn’t have come at a worse time, when the country is grappling with a recessionary situation and the continuing increase in infections. While they say the extent of impact on Indo-Chinese trade remains to be seen, economists warn that the relations between the two countries cannot be seen as an on-off switch, but instead as a dial which India can slowly move and reduce its dependence on China.
Moving away from its dependence on China will be a slow process. If India imposes higher tariffs on Chinese goods, the cost of such goods goes up. With margins anyway squeezed owing to the economic impact of the pandemic, the move may not yield the best results. “India must de-risk from China. But it must take a deep, strategic and calculated approach while doing so, not a knee-jerk one,” an economist tells me.
Pan agrees. He says the problem is not that India will be losing out on exports. The issue will essentially be about the disruption of the supply chain for India. “There are a number of products where Chinese parts are used. If we want to source them from elsewhere, there may be pricing issues which could eventually impact costs and, in turn, dent demand,” Pan explains. This can further delay India’s recovery process.
The IMF’s estimates are, in the end, just that: estimates. The institution itself makes it clear that these could be modified either on the upside or on the downside depending on how countries – including India – deal with the unlocking of the economy. The one big difference is, while most economies have gone in for unlocking after the infection numbers have reached their peak, India has unlocked even as the numbers are rising. The recovery, then, will have to be attempted even as the virus is around. That will make the task an even bigger challenge. It will be a test for both the government and the Indian entrepreneurs and companies which make up the economy. A test India will hope it wins at the earliest.
(The writer is Editor, Fortune India)
