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Explained Ideas: Why a sharp economic recovery in 2021 can be misleading

CRISIL sees India’s GDP growth rate rebounding to 10 per cent in 2021-22, writes Dharmakirti Joshi.

By: Explained Desk | New Delhi | Updated: September 22, 2020 8:51:52 am
People wearing face masks as a precaution against the coronavirus wait for transportation at a bus station in Jammu (AP)

Going by the flurry of revisions in forecasts since the National Statistical Office (NSO) announced that gross domestic product (GDP) in the April-June period had shrunk by 24 per cent, a much deeper hit to Indian economy this fiscal appears certain now. Besides, unless inflation climbs down below 6 per cent, the Reserve Bank of India would be constrained from cutting rates.

Writing in The Indian Express, Dharmakirti Joshi, chief economist of CRISIL Limited, says: “As things stand, till the time a vaccine is found and mass-distributed, forecasting the economic environment, and as a consequence, decision-making, will be dominated by what John Kay and Mervin King, in their recent book, refer to as ‘radical uncertainty’ — a situation in which we know something but not enough to act with confidence. And that too when the stakes are high. If the experience of the last few months is any guide, it will indeed be a very complicated transition to what we regard as normal”.

High-frequency economic indicators till August-end show a recovery vis-à-vis the first quarter. But they remain in contractionary phase, indicating that the economic contraction will continue in the second quarter, though not as severe.

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“We expect the economy to contract by 12 per cent in the second quarter. If the pandemic were to peak out by October, GDP growth could move into mildly positive territory towards the end of this fiscal,” states Joshi.

As was the case in the deep downturns in the past, 2021-22 could see a sharp mechanical lift from the deep trough this fiscal. Milton Friedman’s “Plucking Model” could be used to explain if such a recovery does take place next fiscal in the absence of a notable fiscal push. Friedman compares an economy to a string instrument — while recessions pluck the string down, it bounces back thereafter.

Joshi sees India’s growth rebounding to 10 per cent in 2021-22, on a very weak base and with some help from the rising global tide that will lift all boats.

“The key assumption here is the availability of vaccine in early 2021, in the absence of which, all bets are off,” he cautions.

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In the post-pandemic world order, relentless pursuit of efficiency will take a back seat as other considerations such as resilience and reliability take precedence. (Illustration by C R Sasikumar)

Even so, real GDP will merely catch up to the 2019-20 level in 2021-22. The economy will suffer a permanent loss of 13 per cent of GDP which works out to Rs 30 lakh crore in nominal terms.

“So a sharp recovery in 2021-22 can be highly misleading,” he clarifies.

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