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EditorialsRecession, a bitter reality now

Recession, a bitter reality now

Published: 29th Nov 2020 10:58 pm

India has now entered a historic technical recession with the economy contracting 7.5% in the September quarter. The fact that the rate of contraction is far lower compared with 23.9% in the previous quarter should offer no solace. The ‘technical recession’ denotes contraction of the economy for two consecutive quarters. The surge in coronavirus infections in some parts of the country in the last few weeks again poses a big risk to economic recovery. The future prognosis thus depends on two factors— the nature of the recovery from Covid-19 infections and how fast the vaccine is rolled out. The current trends indicate that the Covid cases had peaked in September. With Unlock 5.0 and festival season till December end, chances of a possible second wave will increase. In a state of the economy review presented earlier this month, the Reserve Bank of India had forecast that the economy is likely to contract 8.6%. In that sense, the recovery has been better than expected, partly helped by decent agricultural growth and some pick up in manufacturing activities. However, sustained growth can happen only through job creation. Critical employment generating sectors like construction, mining and services remain weak. It must be pointed out that India has a very large unorganised sector. Inflation remains high and a significant part of this rebound could be because of pent-up and festive demand. With signs of fatigue emerging in the recent demand uptick, the second wave of infection already impacting economic activity and the likelihood of a much weaker third-quarter activity, the FY21 is expected to see the real GDP contracting by 8.6%.

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The economic recovery needs to be carefully monitored due to lingering risks. After an uptick in early November, high-frequency indicators are beginning to show fatigue now while the possibility of dwindling pent-up demand and rising infections could limit broader gains. With infections rising in parts of the country, stress needs to be on safety measures to avoid fresh disruption. Economic growth is expected to remain negative in the third quarter and post a small positive growth in the fourth quarter. While the NDA government has announced a slew of measures to support growth, they have fallen well short of expectations to boost demand, leaving the Reserve Bank of India to do much of the heavy-lifting. An Oxford Economics report has pegged the potential growth for India at 4.5% over the next five years, lower than 6.5% before the pandemic. The headwinds that were hampering the growth before the outbreak of the pandemic—such as stressed corporate balance sheets, elevated non-performing assets of banks, the fallout in non-bank financial companies, and labour market weakness—may worsen in future.

 


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