India’s economic recovery looks brighter than it actually is; worst over, regaining ground will take time

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January 04, 2021 3:40 PM

Though in on-year growth terms, FY22 would appear to be an extremely good year, in level terms, it would only be slightly better than FY20.

“We are looking at a 50 basis point cut in the repo rate for 2021 and we are looking at a 100 basis point hike in interest rate in FY23,” said Indranil Sen Gupta, India economist, BofA Securities.“We are looking at a 50 basis point cut in the repo rate for 2021 and we are looking at a 100 basis point hike in interest rate in FY23,” said Indranil Sen Gupta, India economist, BofA Securities.

India’s economy is recovering at a better-than-expected pace since the fiscal second quarter but it may take a long time to regain the momentum it had before the pandemic kicked in. The projected GDP growth does indicate that the worst is over, but it still does not indicate whether the economy has recovered the lost ground or surpassed it, said a report by India Ratings. The size of the Indian economy in FY20 was Rs 145.66 lakh crore at constant prices. Further, it is expected to contract 7.8 per cent on-year to Rs 134.33 lakh crore in FY21, and grow 9.6 per cent on-year to Rs 147.17 lakh crore in FY22, according to the estimates of India Ratings. 

Though in on-year growth terms, FY22 would appear to be an extremely good year, in level terms, it would only be slightly better than FY20. It would be only about 1 per cent higher than the FY20 level. This suggested that the economy will be able to just recover the lost ground in FY22, and surpass the FY20 GDP level in a meaningful way only in FY23, the rating agency added. 

To further understand the actual impact of the pandemic and calculate the recovery in a more appropriate way, it is important to understand that if the pandemic had not arrived and the Indian economy had posted modest GDP growth of 5 per cent in FY21 and FY22 respectively, the size of the economy by FY22 would have been Rs 160.59 lakh crore. Based on this, even with a 9.6 per cent GDP growth, the size of the economy in FY22 would reach only Rs 147.17 lakh crore, due to the pandemic. On the other hand, to achieve Rs 160.59 lakh crore, the GDP will have to grow at 19.5 per cent in FY22, which looks impossible at the moment.

The above analysis shows how the enormity of the loss to the economy becomes quite unclear with an on-year growth and why there has to be pragmatism why calculating the recovery. India Ratings underlined that if the output loss is converted into loss in consumption demand and employment, the damage to the economy may appear even bigger.

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