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India After experiencing one of the world’s tightest lockdowns and recording the deepest GDP contraction among G20 economies in the second quarter of 2020, the Indian economy is recovering, albeit with some hesitancy. While agriculture has benefited from favourable weather conditions, manufacturing and services are penalised by remaining containment measures and uncertainty. Significant social hardship persists and the fall in the unemployment rate must be seen against the background of declining labour force participation. Supply chain disruptions have pushed inflation above the target range of the central bank. GDP is set to shrink by 10% in fiscal year (FY) 2020-21, with household consumption sluggish and investment largely unresponsive to easier monetary conditions. Despite a projected rebound of around 8% and 5% in FY 2021-22 and FY 2022-23, respectively, due to base effects and returning confidence, the GDP loss will be substantial. COVID-19 is exacerbating pre-existing vulnerabilities related to poverty, high informality, environmental degradation and lack of employment opportunities. To increase resilience, the government has responded with three stimulus packages, but additional fiscal measures are needed to mitigate the damage, together with a credible medium-term consolidation plan. The reform effort has continued, notably in the areas of agriculture and employment. However, poor performance of public banks, a pervasive regulatory burden, and understaffing of the judiciary hinder the proper allocation of resources needed for inclusive growth. India 1 Inflation exceeds the target
The return to sustained growth will take time Volumes
Y-o-y % changes 14 12
Consumer price index
GDP
Wholesale price index
Investment
10
Y-o-y % changes 80 60
Private consumption
40
8 6
20
CPI inflation target band
4
0
2
-20
0 -40
-2 -4
2019
2020
0
0
2013
2015
2017
2019
2021
-60
Source: National Statistical Office; Ministry of Commerce and Industry; and OECD Economic Outlook 108 database. StatLink 2 https://doi.org/10.1787/888934218672
OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020
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India: Demand, output and prices 2017
2018
Current prices INR trillion
India GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1,2
Net exports1 Memorandum items GDP deflator Consumer price index Wholesale price index3 General government financial balance4 (% of GDP)
_ _ _ _ _
Current account balance (% of GDP)
2020
2021
2022
Percentage changes, volume (2011/2012 prices)
171.0 100.9 18.4 48.0 167.3 9.1 176.4 32.1 37.5 - 5.4
Total domestic demand Exports of goods and services Imports of goods and services
2019
6.1 7.2 10.1 9.8 8.2 0.4 5.5 12.3 8.6 0.4
4.2 5.3 11.8 -2.8 3.6 0.0 3.2 -3.6 -6.8 0.9
-9.9 -13.3 12.5 -22.9 -12.9 -1.9 -13.5 -10.7 -27.8 3.9
7.9 7.8 6.8 12.9 8.9 0.0 9.0 5.8 12.0 -0.9
4.8 6.5 1.2 4.8 5.2 0.0 5.2 4.1 6.1 -0.3
4.6 3.4 4.3 -6.2 -2.1
2.9 4.8 1.7 -6.1 -0.8
1.5 5.9 -1.2 -8.3 0.9
3.2 4.6 3.2 -6.7 0.5
1.0 4.6 3.7 -6.1 -0.4
Note: Data refer to fiscal years starting in April. 1. Contributions to changes in real GDP, actual amount in the first column. 2. Actual amount in first column includes statistical discrepancies and valuables. 3. WPI, all commodities index. 4. Gross fiscal balance for central and state governments. Source: OECD Economic Outlook 108 database.
StatLink 2 https://doi.org/10.1787/888934218691
India 2 The unemployment rate has returned to early 2020 levels % of labour force 30
The current account balance is temporarily improving¹ % of GDP
Urban Rural
25
2
20 0 15 10
-2
5 0
2016
2018
2020
0
0
2018
2019
2020
2021
2022
-4
1. Data refer to fiscal years beginning on April 1. Source: Centre for Monitoring Indian Economy (CMIE); and OECD Economic Outlook 108 database. StatLink 2 https://doi.org/10.1787/888934218710
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A tight containment regime has slowed but not halted the virus spread One of the world’s earliest and toughest lockdowns helped to slow the diffusion of the virus. While India has recorded the world’s third-largest number of COVID-19 deaths in absolute terms, the rate per capita is considerably lower than in most other large countries. The lifting of the lockdown began on 1 June and has been organised in five phases. Both the number of new infections and the number of deaths were at their highest in the first half of September and started declining rapidly afterwards. In Unlock 5.0, currently in place, the main remaining restrictions concern schools (a preference for online/distance learning), some recreational activities (such as indoor swimming and cinema halls) and worship places, while tighter lockdowns are imposed in selected locations (so-called containment zones).
The growth revival after the collapse has been hesitant The economy is still struggling to return to the activity levels prevailing before COVID-19 hit and available indicators send conflicting signals. The rate of activity resumption, as proxied by high-frequency mobility data and more traditional real economy indicators, was vigorous until late August but has since cooled. Power demand, car sales, railway freight and the manufacturing PMI indicate ebbing momentum. Some industries, such as producers of capital equipment, keep contracting. Others are taking advantage of shifts in consumer preferences, like the one towards cars and two-wheelers that are deemed safer than public transport. On the bright side, financial markets have been extremely buoyant since the March-April trough. The current account surplus rose to 3.9% of GDP in the June quarter. Labour market data are harder to interpret, with the recent decline in the unemployment rate contrasting with the participation rate still inching down. Urban poverty is seen as worsening and the number of school dropouts surging, especially among first-generation pupils from disadvantaged households. The disruption of the cooked meal programme, and of the mid-day school meal scheme in particular, could worsen child malnutrition.
Monetary policy has done much of the heavy lifting to support the economy Monetary easing, fiscal stimulus and supportive financial regulation have countered the effects of the lockdown and of the income shock. The Reserve Bank of India cut the policy repo rate from 5.15% to 4%, introduced mandatory credit repayment moratoria and one-off debt restructuring with upfront provisioning. The initial fiscal support amounted to about 6.9% of GDP (of which 4.9% were off-budget measures designed to support businesses and shore up credit) and was followed by a 0.2% of GDP additional package focused on household consumption ahead of the Diwali festivities and a third intervention in November of around 1.4% of GDP spanning several fiscal years. Some structural reforms were also approved, notably to liberalise the notoriously rigid formal labour market and to support synergies between agriculture and agribusiness. With a fiscal deficit around 16% of GDP, largely due to tax revenue losses rather than substantially higher growth-enhancing expenditure, and swelling public debt, there is scant room for further fiscal expansion and the FY 2021-22 Budget is expected to be cautious. On the other hand, the recent RBI forward guidance signals its accommodative stance is set to continue. While the scope for further relaxation is currently limited by headline inflation in excess of the target range, food-related supply-side pressures are expected to abate. Against this background, additional cuts in the policy rate are projected around the turn of the fiscal year.
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Prospects are uncertain and risks are mostly on the downside Following a projected GDP contraction of 10% in FY 2020-21, economic growth is on course to rebound. Although confidence will return, the scars to the economy and society are lingering and it may take almost two years for GDP to get back to pre-pandemic levels. Inequality will rise, also in response to protracted school closures and reliance on online learning. In addition, weak balance sheets call for debt deleveraging in the private corporate sector, while the financial sector, including non-bank lenders, deals with its bad loans – a combination that will weigh on investment, with the possible exception of digital technologies. The assumption that all COVID-19-related restrictions will be lifted by 2022 hinges on access to and rolling out of a safe and effective vaccine, even though the immunisation campaign will be an immense logistical and operational challenge and the cost substantial. Other risks are equally on the downside. Most sectors are operating far below capacity and this short-term frailty might produce scarring effects and eventually morph into a permanent decline in trend growth. On the inflation side, the 2020 surge may not reverse as swiftly as expected if some supply chain bottlenecks persist, such as producers in the informal sector that fail to restart activity after the pandemic, which would put pressure on prices. On the upside, an earlier-than-expected roll-out of a vaccine or effective treatment and the ensuing uptick in global growth would translate into faster domestic growth.
Policies should focus on sustainability and efficiency The COVID-19 crisis is a vivid manifestation of the vulnerability of the poor to shocks, especially if they are unskilled, women, children, migrants or disabled, and the crisis is already reversing some of the well-being progress of the past decade. At a minimum, policies should protect workers, particularly in the informal sector, through portable welfare instruments that cater to both rural and urban populations, and guarantee food and cash support across state boundaries. Better targeting of energy and fertiliser subsidies, as well as tax expenditures, would free resources for pro-poor fiscal policies. Equally important is to make it easier for capital, labour, technology and talent to move towards their most productive use. Reforms aimed at this, which invariably entail reducing privileges and rents, should focus on the governance of state-owned enterprises, insolvency and bankruptcy legislation, and the professionalism of the judiciary. Further trade and foreign investment opening, including reducing and simplifying tariffs and liberalising trade in services, would also increase competition on the Indian market and boost economic growth.
OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020