India suffers from first recession in decades

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Official data released on Friday showed gross domestic product for the July-September quarter fell 7.5 percent from the same period last year, when the economy grew by more than 4 percent.

This follows a record drop of almost 24% in GDP during the April-June period, the first quarter of India’s fiscal year.

“In order to contain the spread of the Covid-19 pandemic, restrictions were imposed on economic activities not deemed essential during [the first quarter]India’s statistics ministry said in a statement on Friday. “Although the restrictions have been gradually lifted, there has been an impact on economic activities.”

As the manufacturing sector returned to growth, the service sector suffered a second consecutive double-digit decline. Public consumption also fell sharply partly due to a “Inadequate fiscal response to the crisis,” said Shilan Shah, Indian senior economist at Capital Economics.

AstraZeneca’s positive preliminary results on its vaccine candidate are good news for India, given that it has one of the largest orders of any country and the vaccine will be produced locally, Shah added.

The vaccine is “the most encouraging sign yet that India has a path to end its Covid-19 epidemic and the social distancing which continues to weigh on the economy,” he said in a research note.

But distribution issues could mean that a vaccine would not be widely available until the second half of next year, added Priyanka Kishore, head of the India and Southeast Asia economy at Oxford Economics. There are also concerns that a lack of clarity regarding vaccine trial data could delay regulatory approval.

Both economists said India’s economy has a tough road ahead. “The lack of a comprehensive fiscal response … will hamper future growth,” Kishore said.

Investors will pay close attention to this when India’s central bank meets next week.

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“Under these circumstances, monetary policy is likely to remain very loose for the foreseeable future, and we believe the markets are too belligerent to expect modest rate hikes in 2022,” Shah added.

GDP data highlights the contrasting fortunes of India and China in the wake of the pandemic.
While much of the world has continued to fight the virus, China’s recovery has accelerated in the last quarter. The country has enforced strict lockdown and population tracking policies designed to contain the virus, and has set aside hundreds of billions of dollars for major infrastructure projects to spur economic growth. It may be the only major economy to end the year larger than it started.

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