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When will India’s GDP recover?

India’s GDP is expected to contract 7.7% in the year to March as the government prepares to launch what could be the world’s biggest Covid-19 vaccination program.

Meanwhile, the Associated Chambers of Commerce of India (Assocham) believes that India’s economy is headed towards a ‘V-shaped’ recovery in 2021. The approaching Covid-19 vaccination program is said to be one factor. Furthermore Assocham cited the return of consumer confidence, robust financial markets, a surge in manufacturing, and the eagerness of exporters to survive in the global market as the factors that lead to the V-shaped recovery.

However, the National Statistics Office (NSO) says that it may take another year for the country’s economy to return to its pre-Covid level. The NSO’s advanced estimates indicate that the Indian government is expecting most components of the GDP to dramatically fall in the financial year ending March 31.

NSO figures revealed that investment in India will be declining by 14.5% while consumption is expected to decrease by 9.5% due to high unemployment, layoffs, salary cuts and slower economic activity from lockdowns and other Covid-related restrictions.

Industry sectors performance

Some sectors, such as automobiles, are expected to experience a pick-up in sales numbers, driven by pent-up demand and festival purchases. However, Agriculture and electricity generation are the only two sectors that are forecast to post positive numbers, with projected growth rates of 3.4% and 2.7%, respectively.

But India has the potential to become a strong regional hub for parts sourcing of some industries due to its manufacturing capabilities and high consumption levels.

Shashank Tripathi, partner and strategy leader at PwC India, said as per Hindu Business Line: “India has the potential to emerge as a parts sourcing hub for aerospace, defence and engineering products. In segments like aerospace manufacturing, China is not a key supplier to many OEMs as several of them have their facilities in their own countries. Though India is a natural choice as an alternative to China, there is competition from other South East Asian countries such as Vietnam and Singapore.”

Apart from the country’s strong domestic consumption, India is also known for of its wide availability of skilled people and a good maturity level of industries, in terms of quality, cost and delivery.

On the other hand, the sectors that are projected to register the most dramatic decline are trade, hotels, transport, communication, and broadcasting services, which will go from a 3.6% growth in 2020 to a 21.4% contraction this year. This is followed by the construction sector, which is forecast to fall from a 1.3% growth last year to a 12.5% decline in 2021.

Mining is also expected to decline by 12.4% in fiscal year 2021, from a growth of 12.4% in the previous year while manufacturing could decline from a 0.03% growth to a 9.4% contraction.

Rising unemployment – adding to India’s GDP problem

Aside from the expected decline in the GDP, unemployment in India is set to surge again in January after falling in September and November.

According to the Centre for Monitoring Indian Economy (CMIE), unemployment is currently at 8.9% as of January 7 after rising to 9.06% in December. Prior to this, joblessness in the country fell to 6.68% in September due to a boost sales and employment during the annual festival season.

India’s unemployment went up to as much as 23.52% in April following the nationwide lockdown that started March 25.

The Indian government is expected to make fiscal concessions in its February 1 budget to help bolster the economy, bringing hope to some businesses albeit with certain limitations.

Madan Sabnavis, chief economist at CARE Ratings in Mumbai, explained: “The Government has created the right policy framework. It can do no more in the budget and expecting anything drastic is being too optimistic. There are fiscal constraints. The government has shown in this year it was not willing to spend more on investment when it would have been in order. Hence one cannot expect it to do so in the next year.’’

According to Sabnavis, the economy may be expected to return to its March 2020 level by March 2022, with the economy growing by approximately 9-10% in the year to March 31, 2022.

Sabnavis pointed out: “The base effect will help to prop up growth this year and we can expect close to 10% real growth. However, this will be a statistic and what is more important is that jobs have to be created.’’

India has the second-highest number of cases globally, next to the US, recording over 10.3 million cases and nearly 150,000 deaths since it started. The government will begin its vaccination drive on January 26 and is aiming to vaccinate 300 million people by July.