Indian economy could see its first technical recession since 1990s

Economic activity growth was at 7-month high in February 2020, but with the lockdown in place, it may have declined 15- 20% year-on-year (YoY) in March 2020, a report by financial services firm Motilal Oswal said on Monday.

The acceleration was broad-based with 23-month high growth in farm activities and 7-month high growth in the industrial sector, according to the report.

The firm’s Economic Activity Index (EAI) for India’s real Gross value added (GVA), called EAI-GVA suggests that economic growth picked up from 5.2% YoY in January 2020 to 6.5% YoY in February 2020 – the highest in the past seven months.

Another report by Motilal Oswal estimated that only 30-40% of the economy is currently operational at different intensities.

The report reckons that India’s real GDP growth could decline 2-3% YoY in the fourth quarter of FY20 and another 10% YoY in first quarter of FY21.

"An analysis of the adverse impact of lockdown on economic activity suggests that a single day of complete national lockdown could shave off as much as 14-19 basis points (bp) from annual growth and 55-75bp from quarterly growth. It implies that with seven days of complete lockdown and eight days of partial lockdown, real GDP could decline 3% YoY in fourth quarter of FY20 – as against our initial estimate of 4.7%,” It explained.

With 14 days of complete lockdown in April 2020 and assuming that things normalise from mid-May, real GDP could decline 12.2% YoY in the first quarter of FY21.

“This will be the first- ever quarter of de-growth since the quarterly data became available since late- 1990s, and with two consecutive quarters of GDP decline, the Indian economy could see its first technical recession since 1990s,” the report said.

Although investments were up slightly for the second consecutive month, consumption spending grew at 4-month high of 6.3% YoY in February 20, while net exports barely contributed anything to the EAI-GDP.

This lower productivity growth would be largely driven by ‘casual workers,’ who receive wages as per the daily terms or periodic work contracts, according to the report. However, it said, If the economy, remains affected for a longer period, the ‘self-employed’ people (52% of all employment), who operate their own enterprises, and the ‘regular wage/salaried workers’ (23%), would also be seriously affected.