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Thursday, October 01, 2020

‘High GDP contraction due to strict lockdown, economy witnessing sharp V-shaped recovery’: Finance Ministry

The report highlighted the disconnect between real economy and financial markets as well as the possibility of capital flight.

By: ENS Economic Bureau | New Delhi | September 5, 2020 12:25:56 am
Nirmala Sitharaman, Nirmala Sitharaman interview, Nirmala Sitharaman Indian Express interview, Nirmala Sitharaman on vaccine, Nirmala Sitharaman on covid vaccine, covid vaccine, India news, Indian ExpressSitharaman said Saturday the economy continues to face challenges of a different nature with no clear-cut end date for the pandemic, especially in the absence of a sure-shot vaccine.

India imposed the most stringent lockdowns among the countries most affected by the Covid-19 pandemic, resulting in a sharp contraction of 23.9 per cent in the Gross Domestic Product (GDP) growth rate in the April-June quarter, the monthly economic review by the Department of Economic Affairs, Ministry of Finance, stated. The lockdown has enabled the country to restrain the pandemic-induced death rate to one of the lowest in the world, and the economy is now witnessing a sharp V-shaped recovery.

“Relative to these advanced nations, India’s GDP contraction at 23.9 per cent is slightly higher. The higher contraction has resulted from the stringent lockdown that India enforced in the April-June quarter. India enforced the most stringent lockdown as reflected in the Government Response Stringency Index developed by Oxford University. The lockdown has enabled India to restrain the pandemic induced death rate to one of the lowest in the world…as countries unlocked in the quarter starting in July, recovery is underway globally. India, too, is witnessing a sharp V-shaped recovery,” it said.

The Ministry said the worst seems to be behind as high-frequency indicators show an improvement June onwards. Though the macroeconomic indicators show a path towards a V-shaped recovery, uncertainty still persists because of the pandemic and the resultant impact on the discretionary demand.

“Residual uncertainty persists because of the effect created by the pandemic on the precautionary motive to save which sharply affects the demand for discretionary goods and services. Unlike previous crises that originated from economic factors, the uncertainty in the current crisis stems from health factors originating from the pandemic. As a result, the uncertainty on discretionary items is likely to influence recovery,” the report said.

The arrival of the Covid vaccine would signal the end of this uncertainty and bring back discretionary consumption to pre-COVID levels, it added. The report noted that various high frequency indicators point towards a V-shaped revival in economic activity — including auto sales, tractor sales, fertilizer sales, railway freight traffic, steel consumption and production, cement production, power consumption, e-way bills, GST revenue collection, daily toll collections on highways, retail financial transactions, manufacturing PMI, performance of core industries, capital inflows and exports.

Even though public finances have been stretched, government consumption spending has provided a measure of relief, with central government’s revenue expenditure, net of interest payments and major subsidies, having risen by 33.7 per cent in the first quarter of the year. They spending has being supported by gross market borrowings by the Centre rising to Rs 5.84 lakh crore up to August 21, 2020, which is 1.72 times the amount raised in the same period last year.

Along with the prospects of a V-shaped recovery, the report highlighted the disconnect between real economy and financial markets as well as the possibility of capital flight.

“Risk taking sentiment has returned with global and domestic equity markets on an untamed recovery path, reaching pre-Covid highs and recouping most of their losses. The recent gush of liquidity in emerging markets is driven by low interest rates, unprecedented monetary priming by major global central banks and optimistic prospects of Covid-19 vaccine. Stock markets are deriving their inexplicable buoyancy from this global surplus liquidity … This, however, raises concerns of an underlying disconnect between the real and financial sectors,” it said.

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