India's economy is likely to contract by 5% this fiscal due to COVID-19 pandemic, according to a report by CRISIL. With the lockdown 4.0 expected to be replaced by lockdown 5.0, the economy may get even worse. 8 states in India contribute to 50% of its GDP. Within these 8 states, almost 42% of the GDP is driven by areas which are now red zones. So then, what is India's economy looking like?
In an interview to BOOM, DK Joshi, Chief Economist at CRISIL speaking about the economy and the recession said, "This is India's first recession since liberalisation, and fourth since independence. In the past all the recessions where agriculture driven. 50% of the GDP used to come from agriculture. You had one bad monsoon and it would drive you into a recession. This trend went on until 1980. This recession is different, I think monsoons are expected to do well this time. The pandemic has delivered a very sharp hit to industries as well as services. But this will be the first recession which will be driven by non-agriculture sectors. This also says how the structure of the economy has evolved and agriculture doesn't have the muscle anymore to create a recession, non-agriculture sectors matter."
An earlier report by CRISIL predicted that India would only lose 4% of its GDP, and now the number has jumped to 10%. He says, "While we had predicted a 4% erosion of GDP in the second phase of lockdown, and our hypothesis was that the pandemic will peak out in May. But the intensity of the lockdown and pandemic has increased. One of the reasons for the reassessment is in great parts the containment measures, and also the fact that the economic package that the government has announced is less than what we were taking into our assumptions."
DK Joshi says there were many factors that went into reassessment, like "The shape of the economic recovery will depend on how the virus behaves from information available from the experts. If we see that titling towards worse, that will affect the economic outlook because it means more stringent restrictions. I think there is no scientific method to project at this juncture, the models will not work, the way they worked earlier, there's a lot of judgement that goes into this assessment."
Some areas in red zones are India's strongest hubs of economic activity. Should production centres relocate to green zones? DK Joshi points out, "I don't think businesses will relocate. Even if you were to relocate, economic activity will not return to its fullest because of coronavirus. People will not consume the way they did, services will not be provided as before, the demand for these products is not going to rise in any way. I don't think there is not going to be any surge in demand this year for industries to ramp up their production to that extent. Look at the auto sector, they're 80% down."
Since some parts of consumer goods and industries have restarted, are there any upward trends there? DK Joshi says, "Since consumers were not buying non-essential items for a long time, there might be a pent-up surge in those items but that is not going to last. Sustainability of consumption depends on income, and I think in this scenario, even if people's incomes are not falling much, they would like to save and not consume. That's how people behave in a crisis. I don't see a surge in demand anytime soon."
Catch the full interview on YouTube.