CRISIL has revised its fiscal 2021 gross domestic product (GDP) growth forecast for India further down to -9% from -5% projected in May. The reasons behind the revision, in the order of importance, are: 1) unfettered spread of the Covid-19 pandemic, 2) inadequacy of fiscal support and 3) stickiness of inflation, limiting rate cut possibilities. 

India’s Covid-19 tally crossed 50 lakh as on September 16. Despite this, India has had little choice than to open up its economy, to prevent another sort of humanitarian crisis. So, we expect the second quarter GDP to shrink far less than the preceding one.

So far, it is the central bank that has done the heavy lifting via liquidity infusion, rate cuts and increased forbearance. But now, with inflation showing no decisive signs of softening, the Reserve Bank of India (RBI) is likely to hold interest rates.

The pandemic has magnified the pre-existing weakness in private consumption and investments. The fall in gross fixed capital formation has been much steeper than that in private final consumption expenditure. Continued uncertainty about employment prospects and incomes means consumption may remain weak for longer. High retail inflation at a time when incomes are falling, is a double whammy to disposable incomes.

Rural India, representing almost half of the Indian economy, held up better than its urban counterpart largely because of normal agricultural performance and the rural tilt of government’s support. But, depressed rural wages, drying up of remittances and the pandemic’s spread to rural areas, could dampen prospects.

Investments fell far more sharply than consumption in the first quarter, and will take longer to recover with the government’s ability and the private sector’s willingness as well as ability to invest impaired. Also, most services will take longer to recover than manufacturing, in line with what happened in countries that fought the pandemic early.

In the upcoming monetary policy, unless the RBI decides to ignore the idiosyncratic factors influencing inflation, we expect the pause on rate cuts to continue. The RBI will need to lean on non-rate actions to support the economy, for some time to come.

The pandemic shock is expected to result in a permanent loss of 13% of real GDP, or Rs 30 lakh crore in nominal terms, over the medium term. The medium-term growth path for India is likely to trend down in the business-as-usual scenario. Growth may have to lean more on technology and efficiency improvements, with reforms undertaken over the past few years, such as digitalisation, push to financial penetration and connectivity, and Goods and Services Tax, yielding gains.