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India's GDP may contract by 7.3% if COVID strikes again

By Indivjal Dhasmana
Last updated on: June 11, 2020 12:03 IST
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However, the growth during the next financial year would be higher at 8.1 per cent in case of a second wave of the coronavirus and bit slower at 7.9 per cent if the virus recedes and remains under control.

Covid Curve

Illustration: Dominic Xavier/Rediff.com

The Organisation for Economic Co-operation and Development (OECD) on Wednesday projected India's economy to contract 7.3 per cent in the current financial year if the coronavirus hits the country for a second time later this year.

This is so far the steepest contraction that any agency has predicted for the country.

If it doesn't, the grouping of advanced countries in its twice-yearly publication—OECD Economic Outlook -- said that it expected India's economy to contract 3.7 per cent during the year.

 

In the double-hit scenario, a renewed virus outbreak will require a new general shutdown in autumn, while the single hit scenario assumes that the ten-week general lockdown, followed by some targeted lockdowns, will succeed in avoiding an acute health crisis.

However, the growth during the next financial year would be higher at 8.1 per cent in case of a second wave of the coronavirus and bit slower at 7.9 per cent if the virus recedes and remains under control.

OECD said, "The poor, informal workers and small enterprises will suffer disproportionately; weak bank and corporate portfolio positions will keep the investment rate low, weighing on growth prospects."

However, inflation remains under control given the economic slack and low oil prices, it said.

But, public deficit will spike, reflecting faltering tax receipts and needing spending to support people, banks and small enterprises, OECD cautioned.

The report said protecting human lives was the immediate priority and required additional health care resources and generous support to the poor.

"Getting activity back and avoiding a durable effect from the crisis on income and jobs require promoting access to credit," it said.

Bank recapitalisations and governance reforms should accompany government-backed guarantee schemes, OECD advised.

An inclusive growth strategy over the longer run should include prioritising social investment and income support for the poor, which can be financed by reducing energy and fertiliser subsidies and the tax expenditures that most benefit the rich, and modernising labour and business regulations to promote quality job creation and extend the social safety net, OECD suggested.

In case of a double-hit by the coronavirus, OECD has pegged global economic contraction at 7.6 per cent in 2020 and 6 per cent in case of a single-hit scenario.

It said both scenarios are sobering, as economic activity does not and cannot return to normal under these circumstances.

"By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments," OECD said on its global outlook.

On the spread of the virus in India, OECD said despite early and strict containment measures, the virus is affecting many.

"The virus manifested itself from late January. Infections have been concentrated in large cities, in particular slums, with a risk of a fast spread given India’s high population density, poor housing conditions in some areas and large internal migration flows.

"The number of new cases was still rising as of early June," it said.

It pointed out that high air pollution adds to the severity of cases while the population age structure - almost half of Indians are below the age of 25 - has the opposite impact.

Human costs from the disease have been compounded by a shortage of healthcare resources, in particular hospital beds, doctors, and testing facilities, it said.

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Indivjal Dhasmana in New Delhi
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