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India’s economy may contract more than estimated earlier; firms won’t operate at over 70% capacity

The fall in demand, job loss, and low purchasing power amid the coronavirus-led economic crisis may lead India’s GDP to shrink by 6.4 per cent.

India’s economy may contract more than estimated earlier; firms won’t operate at over 70% capacity

On the back of various restrictions still imposed in the country, the Indian economy may contract much more than the estimated level of 5 per cent. The fall in demand, job loss, and low purchasing power amid the coronavirus-led economic crisis may lead India’s GDP to shrink by 6.4 per cent, said a report by Care Ratings. Two-third of the economic sectors would broadly be operating at 50-70 per cent capacity by the end of the third quarter and the rest of the sectors may not even reach this level, the report added. Adding to the woes, services like hospitality, tourism, entertainment, and travel are estimated to take a long time to catch the lost pace.

While it has been estimated that the agriculture sector will show positive growth, higher agricultural production may not necessarily lead to higher income for farmers as excess supplies may lead to moderation in prices. Hence, it is also predicted that increased rural consumption will not be able to compensate for lower spending in the non-farm sector. 

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The Care Ratings’ report also said that the secondary sector, including manufacturing, mining, and electricity, is likely to face a sharp contraction of 9.5 per cent in FY21, while the services sector, including construction, may shrink up to  6.5 per cent in the same duration. Showing the pessimistic outlook, the report underlined that job losses and pay cuts will force people to spend less even during the festivals. 

Meanwhile, the rating agency forecasted an annual contraction of around 1.6 per cent in May, however, under the possibility of continued distress in the economy, it revised down the projections substantially.  India’s economy has been facing the downside risks from low demand prevailing from at least three years. The effect of the coronavirus pandemic further jolted the market, which has made the situation more worrisome in the near future. However, as India steps out of the lockdown restrictions, the green shoots of revival have also started to become visible. 

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First published on: 02-07-2020 at 03:33:18 pm