India to see recession due to worsening consumption, investment demand: Monetary policy panel


JUNE 5, 2020

Worries over India’s economic growth dominated discussions of the monetary policy committee that met last month, ahead of its scheduled meeting this week, and announced a 40 basis points rate cut.

Most members agreed India is headed towards a recession in 2020-21 from a worsening of private consumption and investment demand, according to the minutes of the meeting released Friday.

The 6-member policy committee has three members from the Reserve Bank of India (RBI), including RBI Governor Shaktikanta Das, and three other independent members.

Michael Patra, deputy governor of the RBI and a member of the committee, said the destruction of economic activity by Covid-19 and ensuing lockdowns are much more deleterious in terms of loss of basic livelihood, economic security, health and confidence than what GDP projections and other macroeconomic indicators suggest.

He said the “damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair”.

Patra added the “threats to growth have to be addressed frontally and aggressively, or risk a more dire outlook”.

The monetary policy panel statement had not given any growth estimates for 2020-21 except for highlighting the downward risks to growth. Only the RBI governor’s statement alluded to the fact that India is expected to contract in 2020-21. But the minutes of the meeting show that growth contraction was a key concern.

‘India is staring at a huge negative growth’

Ravindra H. Dholakia, former professor, Indian Institute of Management, Ahmedabad, pointed out a lockdown in geographical areas that contribute a major share in the Indian economy and worsening global economic situation due to Covid-19 may push real GDP growth into negative territory for the first time in 40 years.

“Even the nominal GDP growth may slip into the negative zone. There are all symptoms of a recession — fall in aggregate demand, negative real growth and high unemployment,” said Dholakia, a member of the panel.

Pami Dua, former director, Delhi School of Economics, pointed out the economic situation is “extremely gloomy”.

“While the Covid-19 pandemic is a humanitarian and health crisis, the related lockdown has precipitated a collapse in economic activity, which has come to a near standstill. Other than in the agriculture sector, economic activity may continue to remain sluggish even after the lifting of the lockdown, due to social distancing and shortage of labour as a result of the migration of workers to their native places,” she said, adding that GDP growth in 2020-21 is expected to remain in the negative.

India is expected to contract by at least 5-12 per cent, most economists have forecast, with a complete halt in economic activity on account of the lockdown.

Janak Raj, executive director at the RBI, said India is staring at a huge negative growth in the current quarter and overall negative growth for the year as a whole.

“Both demand and supply sides of the economy have collapsed. However, I believe that supplies would recover much faster than demand. This is because capacity to produce goods and services by and large remains intact, though non-availability of labor may temporarily hamper production for a few months. On the other hand, however, there has been a substantial loss of demand,” he said, pointing out that private consumption will be adversely impacted.

He added consumer confidence has been dented and consumers are likely to cut down on discretionary spending.

Raj, a member of the monetary policy panel, further said investment demand will be hit hard in this uncertain environment and may be a “huge drag on economic activity in the near future with attendant implications for potential growth”.

Courtesy/Source: ThePrint