India’s GDP is likely to shrink by double digits in FY2021 with all quarters of the fiscal posting GDP degrowth as COVID-19 spreads further into rural areas, according to a State of Bank of India (SBI) report. The report revised its GDP estimate for Q1 to negative 16.5pc from a 20pc decline estimated earlier.

 

Business disruptions have eased in India and SBI’s business disruption index has recovered from April with gradual improvement as it recorded a significant recovery by the end of June. However, in Unlock 2 phase, the index plateaued amid staggered partial lockdowns imposed by State governments to control the spread of the pandemic. In recent weeks, the index has improved as business activities have regained momentum.

 

Though COVID-19’s spread in rural regions is causing alarm, the rural recovery is expected to have little impact on GDP growth. The overall percentage of the virus infections in rural districts among total new infection has increased to 54pc in August. States of Andhra Pradesh and Maharashtra have been severely impacted by the pandemic in rural districts, which is expected to impact economic activities here.

 

Actual headline inflation is much higher than government’s official data, states the report. Factoring in the changes in consumption pattern, SBI’s Computed COVID CPI estimates that July CPI is likely to be higher than 7.5pc compared 6.9pc computed by the National Statistics Office. Consumption patterns in urban and rural regions indicate that recovery in urban areas is a must for overall economic recovery. 

 

A negative GDP and high inflation levels are suppressing real consumption and recovery in India. In Q1, manufacturing GDP degrowth is expected at negative 35.8pc and for construction it is at negative 34.6pc from the prior year. 

India has a capacity to produce 138mn mt steel, annually, but the per capita consumption of steel in the country is very low. A demand slump in automobile sector and slowdown in construction due has reduce India’s steel output in Q1. To offset weak demand in the domestic market, major steel producers increased the share of exports in Q1.  

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