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Growth downgrades are just the beginning, further pruning likely

The deterioration is likely to be more than foreseen

May 14, 2021 / 06:11 PM IST

A spate of revised GDP growth forecasts has arrived in recent days. Triggered by the serious resurgence of coronavirus, currently the typical markdowns average 100-150 basis points over the 11 percent consensus for 2021-22; Moody’s revision is steeper at 440bps (from 13.7 percent); while the IMF intends revisiting its 12.5 percent forecast in July.

If we consider the lowest estimate of the revised crop, 8.5 percent, as actual outturn, it represents -0.4 percent growth over 2019-20. This means a second successive contraction in output since 2019-20!

Most, including the finance ministry, uphold that the COVID-19 second wave will not affect output as harshly as last year, mainly because restrictions to curb transmission are not as universal, uniform and across-the-board, similar evidence from other countries, among other reasons. This view ignores nuances that will drag down demand during the course of this year. As things stand, the present downgrades are just the beginning. Further pruning is likely to follow ahead.

The lockdown heterogeneity is not all that diverse if you aggregate the parts, viz. most states and major cities; even when not imposed, the intense fear generated by the virus’ high transmissibility, and fatalities (including due to lack of access to hospitals, oxygen, medicines and general breakdown) is prompting large sections to lock themselves in for security. The related, second round losses of employment and incomes, fresh as well as repeated, will accentuate the income depression faced less than one year ago; the K-shape recovery effects upon households and firms will get more pronounced.

A significant drag on demand will come from rural regions, the new locus of infections and where the bulk of bottom-income earners with robust marginal propensities to consume live. Then, there is not even the sparse fiscal assistance that was provided last year — it is amply clear the policy response to a deadlier wave is limited to the monetary side, i.e. the central bank.


Spending sentiment, appetite and capacity will be affected by the devastating human and economic costs of this wave: these includes tragic deaths of even those able to afford healthcare but are unable to access, ruthless mercenary exploitation, to cite some traumatic experiences. Emotional scars cannot be ignored; these could increase savings to safeguard against further health shocks at the cost of consumption. Consumption is likely to convulse severely as a result. Spending may not return back intact with the wave’s recession and reopening; instead, this may trend lower in the course of the year, the brunt devolving upon discretionary consumption.

A lesser bang than usual can be expected from the exporting side too. Though the external demand impulse is strong from the United States, China, and Europe in the forthcoming months, there are COVID-19-specific peculiarities that could subdue the export impetus: The IMF observes that the post-pandemic global demand will likely shift from durables to services that have accounted for the bulk of the global GDP decline and are well below their pre-pandemic levels; inventory restocking, an important component of cyclical upturns, is likely to be slower due to less stock-unwinding in the pandemic-induced recession than usual ones, and from uncertainties around the pandemic outlook; while sickness may affect full labour requirements (World Economic Outlook April 2021). The export growth relationship with that of world GDP may not as usual therefore. Travel and tourism will suffer in countries under the virus’ grip.

That leaves the aggressive public investment response in this year’s budget as the major driver; private investment was anticipated to take longer to recover. The government intends to maintain public capex, minus which the outlook would be direr.

Last, terms of trade could reverse sharply. Initial signs of a turn in global commodities’ cycle are visible and needs careful watching. An adverse turn would impact consumers, producers and government alike by lowering real purchasing power or incomes, margins and revenues. An opposite play of the 2015-16 scenario, in which positive gains to growth ranged 2-3 percentage points, could be a catastrophe in the above, stressed context.

Though quarterly GDP growth will be positive, the first two quarters because of -24.4 percent and -7.3 percent in June and September 2020, the pandemic’s enduring impact upon consumption is likely to extend its decline and persistence beyond these. In the event, growth in the third quarter (October-December 2021) could well turn negative as corresponding GDP growth was 0.4 percent one year ago. We should worry that the current downgrades may just be the beginning — there will be further cuts out into this year.
Renu Kohli is a New Delhi-based macroeconomist. Views are personal.
first published: May 14, 2021 05:29 pm

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