India steps out of recession - does this mean the worst is over?
GDP to drop 8% this year, versus 4% growth last year - but banking woes persist
Dubai: After two straight quarters of economic contraction, sentiments eased after India reported growth in the last quarter of 2020, but economists were eyeing how recovery will look like in 2021.
India’s quarterly GDP increased 0.4 per cent, while estimating that real GDP in the financial year 2020-21 will decline 8 per cent, as compared to 4 per cent growth in the previous fiscal.
“India’s GDP data confirm that the economy continued to perform well at the end of 2020 and the outlook for this year has improved too as fiscal policy has been loosened substantially,” noted Shilan Shah, senior India economist in Singapore, working at London-based research firm Capital Economics.
Will GDP now rebound sooner?
“Even so, we doubt that GDP will be back on the pre-virus trend any time soon,” Shah added. “As such, monetary policy will remain loose for a long time to come.”
Indian GDP data released on Friday, as expected, indicated only a small contraction in annual growth in the last quarter of 2020, and high-frequency indicators have been pointing to a relatively strong start to 2021.
India’s central bank has sought to also retain its current inflation target of 4 per cent, saying it is appropriate for the next five years, while seeking to build confidence in the broader economy that is still prone to both supply shocks and sudden demand shrinkage.
Heated debate over inflation target
“The debate over the RBI’s 4 per cent headline inflation target – which runs until next month and is currently being reviewed – had heated up this week,” wrote Shah.
“Some prominent government officials have suggested that the central bank should switch to target core inflation, while a paper authored by RBI officials released today makes the case for maintaining the existing target,” Shah further added.
“We agree with the findings of the RBI paper, largely because of the significant role that food prices play in affecting inflation expectations in India.”
Activity returning to pre-virus levels
The coronavirus pandemic has stifled economic growth and led to job losses in the several sectors and subsequent demand destruction in the bottom of the pyramid section of the economy, but analysts have been expecting the economy to grow somewhat faster than estimated over the medium term.
“Indeed, our in-house mobility tracker suggests that activity has returned to pre-pandemic levels,” evaluated Darren Aw, Asia economist at Capital Economics. “The outlook has improved too as fiscal policy has been loosened significantly. That all being said, there are still reasons for caution.”
Although the economy is forecast to shrink in the fiscal year to March 2021, for the first time in more than four decades, the pandemic’s lasting impact on the Indian economy has turned out to be far lower than earlier expected.
New COVID-19 cases remain low
“While new COVID-19 cases remain low, the recent flare up in Maharashtra highlights the risk of targeted lockdowns, at least in the near term,” Aw added.
“Meanwhile, the ailing banking sector looks set to take a further hit this year as more loans turn sour, which we think will prevent the economy from returning to its pre-virus trend any time soon.”
Banking sector concerns remains at the fore even as the economy stages a recovery. India’s $1.86 trillion financial system entered the pandemic already weakened by about $140 billion of bad loans at its banks.
Aw further wrote in a recent note that according to RBI Governor Shaktikanta Das, this is an important barometer in determining the health of the economy. “As such, we think markets are too hasty in pricing in rate hikes within the next 12-18 months and think rates will remain on hold for the foreseeable future.”