Indian economy set to recover faster than expected

Dubai - Economists say fresh set of stimulus measures will help bolster growth

India’s economy, which has entered a rec essionary phase for the first time ever in the second quarter (July-September) of the curren t financial year with a contraction of 8.6 per cent, is poised for a recovery faster than expected, according economists and analysts.

The recovery for Asia’s third-largest economy will also be spurred by the new round of stimulus amounting to Rs2.65 trillion announced by Finance Minister Nirmala Sitharaman last week.

Oxford Economics, a leader in global economic forecasting, said the Indian economy, estimated at $2.6 trillion (Rs194 trillion) for the 2020-21 fiscal year after an unprecedented contraction, “is seen recovering faster than expected and the Reserve Bank is likely to have come to an end of the rate easing cycle”.

After shrinking by a record 23.9 per cent in the April-June quarter, the recession-hit economy — the world’s third-largest in terms of purchasing power parity after China and the US — was forecast to contract 10.4 per cent and five per cent in the third and fourth quarter, respectively and just stabilise in the first three months of 2021.

Technically, a country’s economy is said to be in a recession when its GDP growth is negative for two consecutive quarters or more.

Analysts at Oxford Economics forecast that that inflation is expected to average significantly above six per cent in the fourth quarter of the current fiscal and the RBI may hold policy rates in December monetary policy review meeting.

Moody’s Investors Service has also revised upwards its GDP forecast for India to -8.9 per cent contraction in the 2020 calendar year, as the economy reflates after a long and strict nationwide lockdown but added the recovery is patchy.

Sitharaman also argued that India’s economy is seeing a strong recovery taking root as she announced a series of new measures to provide a further boost to Covid-hit economy.

As per the new round of stimulus measures, Rs1.2 trillion ($16.1 billion) will be pumped into the economy in addition to the Rs1.45 trillion announced last Wednesday.

That takes the total stimulus announced so far including that from the central bank to Rs29.87 trillion, or 15 per cent of GDP.

The finance minister said increased energy consumption, a rise in the purchasing managers’ index, improved bank credit and a stock market surge all suggested stimulus measures taken so far had begun to help the economy bounce back.

Economists said the fresh set of measures will help bolster growth.

“The multi-sectoral announcements are expected to boost sentiment and help bolster the strength of the economic recovery in H2 of FY21. In particular, the measures to boost capital spending and infrastructure, job creation, as well as support the rural farm and non-farm economy, will trigger a virtuous cycle in the economy. While the benefit of some of the measures announced may manifest into a growth boost only over the medium term, they are nonetheless very welcome,” said Aditi Nayar, principal economist at ratings agency Icra.

“Consumer inflation rose back to pre-virus highs in October, with almost every broad category other than fuel experiencing a rise in prices. While Q4 is likely to mark the peak for inflation, we have turned more cautious on the trajectory over 2021,” analysts at Oxford Economic said.

Costlier vegetables and eggs pushed up retail inflation to a nearly six-and-a-half year high of 7.61 per cent in October, keeping it significantly above the comfort zone of the Reserve Bank. Retail inflation stood at 7.27 per cent in September 2020.

“At the same time, robust bottom-up activity data suggest that the economy may be recovering faster than we anticipated. As such, we see an increasing possibility that the RBI’s easing cycle has ended,” Oxford Economics said.

— issacjohn@khaleejtimes.com