India’s economy contracted sharply in the three months leading up to the end of June, according to official data.
It fell 23.9%, its worst crisis since the country started releasing quarterly data in 1996.
The coronavirus pandemic and a grinding lockdown caused massive disruption to economic activity during the quarter.
Experts fear India is eyeing a recession – this will only happen if it also signals a contraction in the next quarter, which experts believe is likely.
A country is considered to be in recession if it reports a contraction for two consecutive quarters. India experienced the last recession in 1980, the fourth since independence.
India has recorded more than 3.6 million cases of Covid-19 so far – on Sunday it reported 78,761 new cases in 24 hours, the largest one-day increase in the world.
But the country continues to reopen because, according to experts, a second lockdown is not economically viable. And the effects of the first foreclosure are evident in the latest GDP figures.
The numbers are not surprising given that the lockdown was in effect for most of the quarter in question – from April to June.
Figures do not reflect India’s ‘real economic distress’
By Nikhil Inamdar, BBC News commercial correspondent in India
As India’s GDP experienced the sharpest contraction on record, this figure is set to undergo further revisions as data collection was severely hampered during the lockdown.
The overall figure is at the high end of what most analysts estimated, but some have warned that in the absence of real-time data, the figure does not reflect the severity of the economic distress.
From hotels and commerce, to power generation, manufacturing and construction, almost all segments of the Indian economy experienced a sharp contraction in the first three months of the fiscal year. The only sector that has shown positive growth is agriculture, at 3.4%.
Clearly, a rapid recovery is unlikely in India, and it is only in the last three months of the year that growth is expected to return to positive territory. Cases continue to climb and lockdowns are underway in several areas. As a result, consumer demand, which determines 60% of GDP, is unlikely to return in a hurry, as most people only go out to buy essentials.
“We expect further fiscal stimulus and liquidity,” Abhimanyu Sofat, research director at IIFL Securities, told the BBC. But with government tax and non-tax revenues falling sharply and spending on the rise, fiscal space to revive the economy remains limited.
India’s economy was already down when Covid-19 hit. Unemployment hit a 45-year high last year and growth fell to 4.7%, the lowest in six years. Production declined as demand declined and banks were burdened with a mountain of debt.
Then came a global pandemic, which only made the situation worse. An unprecedented lockdown at the end of March forced many factories and businesses to shut down temporarily, shutting down most economic activity.
A month after the lockdown, 121 million Indians had lost their jobs, according to the Center for Monitoring Indian Economy (CMIE), an independent think tank.
But the CMIE also estimates that tens of millions of those jobs have since returned, mainly due to a pickup in economic activity with the country reopening from June.
Experts believe, however, that many of these jobs are in the informal sector, largely in agriculture, the backbone of India’s economy.
While most industries, from manufacturing to services to retail, agriculture and agri-food businesses have resisted the trend.
Exemptions from the lockdown, a bumper harvest and the late arrival of Covid-19 in rural areas appear to have helped.