The National Council of Applied Economic Research (NCAER) said Monday it expects the GDP to contract 7.3 per cent in 2020-21 from 12.6 contraction estimated earlier in September. Stating that the long-term effect of sharp contraction this year is likely to be long lasting, the think tank in its mid-year review, however, said it expects the GDP to record marginal growth of 0.1 per cent and 2 per cent in October-December and January-March, respectively.
The gross domestic product (GDP) had contracted by 23.9 per cent in the first quarter of the current fiscal, in the aftermath of the coronavirus pandemic. The contraction narrowed to 7.5 per cent in the second quarter.
“The sharp recovery of GDP in Q2, the bowstring effect, was a welcome surprise. We have accordingly revised our forecast of annual contraction to (-) 7.3 per cent. The revised growth forecasts for Q3 and Q4 are 0.1 per cent and 2 per cent respectively…the economy will have to grow at more than the previous trend rate for it to catch up with its pre-pandemic growth path,” the NCAER’s mid-year economic review said.
It said conventional macroeconomic policies alone will not do, adding, “These will have to be supported by deep and wide ranging reforms, especially in the financial sector, power and foreign trade.” Additional reforms in health, education, labour and land are also urgent, but these will require close coordination between the Centre and states, it said.
The challenge now is to sustain and accelerate the pace of the recovery seen in Q2 over the medium to long term, it said. The massive increase in central and state government borrowing because of the ballooning fiscal deficit, however, is a major challenge for monetary policy and the financial sector.
“The RBI has introduced a whole slew of measures to contain the adverse impact of such a large increase in government borrowing on the cost of money and credit flow to the private sector. But its success has been limited. It is unlikely that a fragile, NPA burdened, financial sector can cope with such massive sovereign borrowing. This poses a major risk for macroeconomic stability,” it said.
The combined fiscal deficit of the Centre plus states is estimated to be over 14 per cent of GDP for this financial year.
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