Resource centre on India's rural distress
 
 

Recent reports predict gloomy days ahead for the overall economy


Most reports and studies by official agencies, international think tanks and private entities indicate the cataclysmic impact of coronavirus pandemic on economy and society. They anticipate that lockdowns imposed by various countries across the globe to reduce the exponential diffusion of COVID-19 (i.e. for flattening the curve by social distancing and quarantines) would adversely affect economic growth and disrupt supply chains in most sectors, on top of causing economic and social hardships for majority of the people.  

ILO's prediction on job losses

The second edition of ILO Monitor on COVID-19 and the World of Work finds that 90 percent of the workers are employed in the informal economy in India. As a result, about 400 million workers in the informal sector are at risk of falling deeper into poverty during the COVID-19 crisis. It may be noted that the country is placed at the high end of the University of Oxford’s COVID-19 Government Response Stringency Index due to its recent lockdown measures. This will impact the informal workers significantly and badly, forcing many of them to return back (from destination locations) to their origins, located generally in rural or backward areas. Please consult chart-1.

Chart 1: Informal workers under lockdown and other containment measures

Source: ILO Monitor 2nd edition: COVID-19 and the world of work, 7th April 2020, please click here to access
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IMF’s growth forecast

The International Monetary Fund (IMF) in its World Economic Outlook (released in April, 2020) has predicted several economies in Asia to expand at modest rates in 2020, including India (1.9 percent), and Indonesia (0.5 percent), although economies of other countries are expected to shrink (such as Thailand, –6.7 percent).

 
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According to the latest issue of World Economic Outlook released by IMF, the growth rate of India’s real gross domestic product-GDP (that is adjusted against inflation) is expected to reduce from 4.2 percent in 2019-20 to 1.9 percent in 2020-21, and rise again to 7.4 percent in 2021-22. Please refer to table-1.

It should be noted that the data provided in the IMF's World Economic Outlook refers to calendar years, except in the case of a few countries that use fiscal years. In case of India, the reporting period for national accounts and government finance data is April-March.

In the foreword to IMF's World Economic Outlook, Economic Counsellor and Director of Research Gita Gopinath, among other things, has mentioned that "quarantines, lockdowns, and social distancing are all critical for slowing transmission, giving the health care system time to handle the surge in demand for its services and buying time for researchers to try to develop therapies and a vaccine." She has also said that "increased health care spending is essential to ensure health care systems have adequate capacity and resources."

Although "broad-based fiscal stimulus can pre-empt a steeper decline in confidence, lift aggregate demand, and avert an even deeper downturn", it is expected to be "more effective once the outbreak fades and people are able to move about freely", says the IMF report. Among other measures of central banks, monetary stimulus and liquidity facilities to reduce systemic stress can also help the economy to cope with the present crisis.

Official growth estimates

As opposed to IMF's predicted 4.2 percent real GDP growth (see table-1), the National Statistical Office (NSO) of the MoSPI (released prior to the COVID-19 crisis) had estimated 5.0 percent (which is the second advance estimates) growth of India's real GDP in 2019-20.

Against IMF's estimated 1.9 percent growth in real GDP (consult table-1), the Economic Survey 2019-20, which was released prior to the pandemic/ lockdown, had anticipated an economic growth (viz. real GDP growth rate) in the range of 6.0-6.5 percent during fiscal year 2020-21.

Based on the Survey of Professional Forecasters (SPF) during the period 6th – 19th March, 2020 (wherein twenty-five panellists participated), the Reserve Bank of India (RBI) has predicted that the real GDP is likely to grow by 5.0 percent in 2019-20 and by 5.5 percent in 2020-21. On the contrary, the RBI after conducting the Survey of Professional Forecasters in January 2020 (wherein forty panellists participated) had estimated the real GDP to grow by 5.0 percent in 2019-20 and by 5.9 percent in 2020-21.

It should be noted that the mean probability pertaining to a possible 4.5-4.9 percent real GDP growth rate in 2019-20 is 0.57 and for a possible 5.0-5.4 percent growth rate is 0.32 (as per 63rd round). Similarly, the mean probability pertaining to a possible 5.0-5.4 percent real GDP growth rate in 2020-21 is 0.34 and for a possible 5.5-5.9 percent growth rate is 0.27.

The median forecast (based on 63rd round survey) for growth in real gross value added (GVA) from 'Agriculture & Allied Activities' is 3.6 percent in 2019-20 (higher by +0.8 percentage points as compared to the predicted growth in 62nd round), which is expected to reduce to 3.0 percent in 2020-21 (lower by -0.2 percentage points as compared to previous round prediction).

Source: Survey of Professional Forecasters on Macroeconomic Indicators–Results of the 63rd Round, released on 3rd April, 2020, Reserve Bank of India, please click here to access 
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The median forecast (based on 63rd round survey) for growth in real gross value added (GVA) from 'Industry' is 1.5 percent in 2019-20 (down by -0.5 percentage points as compared to the estimated growth in previous round), which is likely to rise to 2.9 percent in 2020-21 (though lower by -1.1 percentage points as compared to 62nd round forecasting).

The median forecast (based on 63rd round survey) for growth in real gross value added (GVA) from 'Services' is 6.5 percent in 2019-20 (down by -0.3 percentage points as compared to the predicted growth in 62nd round), which is likely to marginally increase to 6.8 percent in 2020-21 (though lesser by -0.4 percentage points as compared to previous round forecasting).

The growth predictions based on the Survey of Professional Forecasters during 63rd round paint a much rosier picture as compared to the IMF possibly because the RBI’s survey among 25 panellists was conducted at least a week before the imposition of the nationwide lockdown (viz. 25th March, 2020).

Please note that the results presented in RBI's 'Survey of Professional Forecasters on Macroeconomic Indicators– Results of the 63rd and 62nd rounds' represent the views of the respondent forecasters and in no way reflect the views or forecasts of the central bank.

In its Monetary Policy Report of April 2020, the RBI has stated that "overall, apart from the continuing resilience of agriculture and allied activities, other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration."

Estimates by SBI

The State Bank of India's Ecowrap report, released on 16th April, 2020, says that due to the further extension of lockdown till 3rd May, 2020 (with some relaxations from 20th April, 2020), the real GDP growth rate for fiscal year 2020-21 is likely to be around 1.1 percent (which is lower than IMF's 1.9 percent predicted growth rate). The growth rate of nominal GDP is taken as 4.2 percent in 2020-21 and the estimated GDP deflator is 3.1 percent. The SBI report has also estimated that the real GDP growth rate in 2019-20 would be 4.1 percent (which is close to IMF's 4.2 percent estimated growth rate in real GDP), instead of 5.0 percent.

Based on the Periodic Labour Force Survey report 2017-18, the SBI's Ecowrap report has found that there are 37.3 crore workers engaged as self-employed, regular and casual workers, with the share of self-employed at 52.1 percent, casual workers at 25.0 percent and the rest engaged as regular wage earners and others. It has been estimated by the SBI research team that the income loss per day of these 37.3 crore workers due to the lockdown is roughly Rs. 10,151 crore, which translates into a loss of Rs 4.06 lakh crore for a lockdown period of 40 days (Rs. 3.05 lakh crore for a lockdown period of 30 days). Thus, the SBI report recommends that any financial package should at least try to more than compensate for this Rs. 4.06 lakh crore income loss because of the lockdown.

It is worth noting that several civil society groups and concerned citizens had demanded (from the central and state governments) Rs. 3.75 lakh crores as one time emergency cash relief measure for the poor, needy and the vulnerable sections of the society.

Forecasts by KPMG and McKinsey & Company 

The report entitled Potential impact of COVID-19 on the Indian economy by KPMG (released in April 2020) has discussed how economic growth will vary under 3 different scenarios. If there is quick retraction across the globe including India by April to mid-May, then the economy may grow by 5.3-5.7 percent in 2020-21.

If there is global recession despite India being able to control COVID-19 transmission, then the country may achieve growth rate in the range of 4.0-4.5 percent.

If the COVID-19 infection spreads further within the country and lockdowns get extended in the midst of global recession, then India may face an economic growth below 3 percent in 2020-21.

Likewise, an article written by Rajat Gupta and Anu Madgavkar for McKinsey & Company (published in April 2020) has provided GDP estimates for 2020-21 under three different economic scenarios. In scenario 1, the economy is expected to grow by 1.0-2.0 percent in fiscal year 2020-21. In this scenario, it has been assumed that the COVID-19 lockdown would be relaxed after 15th April, 2020 and appropriate protocols would be put in place for the movement of goods and individuals thereafter. It has also been assumed that financial support would be given to households, corporations and banking system (to protect and revive them) in the form of fiscal and monetary stimuli, which is equivalent to 3 percent of GDP.

In scenario 2, the economy would contract by –2.0 to –3.0 percent during 2020-21. In this scenario, it has been assumed that the COVID-19 lockdown would continue till the middle of May 2020, followed by a very gradual resuming of supply chains and normalisation of consumption and production in 3-4 months. To combat economic stagnation under this scenario and for stabilizing and protecting households, companies, and lenders, the country would need to allocate 5 percent of GDP.

In scenario 3, the economy would shrink by –8.0 to –10.0 percent during 2020-21. In the third scenario, it is assumed that that the "virus flares up a few times over the rest of the year, necessitating more lockdowns, causing even greater reluctance among migrants to resume work, and ensuring a much slower rate of recovery." There will be labour shortages due to limited reverse migration in this scenario. The stabilization and stimulus package required would be much broader than that in scenario 2.


References

World Economic Outlook, April 2020: Chapter-1, International Monetary Fund, please click here to access 

ILO Monitor 2nd edition: COVID-19 and the world of work, Updated estimates and analysis, International Labour Organization, 7 April, 2020, please click here to access

Coronavirus Government Response Tracker, Blavatnik School of Government, University of Oxford, please click here to access

Press Note on Second Advance Estimates of National Income 2019-20 and Quarterly Estimate of Gross Domestic Product for the Third Quarter (Q3) of 2019-20, released on 28th February, 2020, please click here to access

Economic Survey 2019-20, Volume-2, Ministry of Finance, please click here to access

Survey of Professional Forecasters on Macroeconomic Indicators–Results of the 63rd Round, released on 3rd April, 2020, Reserve Bank of India, please click here to access 

Survey of Professional Forecasters on Macroeconomic Indicators–Results of the 62nd Round, released on 6th February, 2020, Reserve Bank of India, please click here to access 

Monetary Policy Report - April 2020, Reserve Bank of India, please click here to access 

State Bank of India Ecowrap, Issue No. 03, FY21, released on 16th April, 2020, please click here to access

Potential impact of COVID-19 on the Indian economy by KPMG, April 2020, please click here to access 

Getting ahead of coronavirus: Saving lives and livelihoods in India -Rajat Gupta and Anu Madgavkar, McKinsey & Company, April 2020, please click here to access

FM’s announcement of Rs 1.7 lakh crore in the wake of COVID-19, is less than half of the Rs. 3.75 lakh crores required to fulfill the minimal “emergency measures”, convey concerned citizens & grassroots activists, Press releases by NREGA Sangharsh Morcha dated 26th March, 2020, please click here to access

Annual Report on Periodic Labour Force Survey (July 2017 - June 2018), National Statistical Office, released in May 2019, please click here to access


Image Courtesy: Inclusive Media for Change/ Shambhu Ghatak