India economic forecast: Could there be light at the end of this tunnel? - December 2020 - Deloitte
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India economic forecast: Could there be light at the end of this tunnel? December 2020
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Contents
Second-quarter GDP data reveals interesting conundrums 01
The good and the bad... 03
…but, not so ugly 06
The outlook – what lies ahead 07
Connect with us 11
ii
India economic forecast: Could there be light at the end of this tunnel?
Second-quarter GDP data
reveals interesting conundrums
COVID-19 has weighed down on economic growth in the first rising government spending since the pandemic. Private
two quarters of FY2021, which is no surprise. India was amongst domestic demand contracted, but not as much as in Q1. Private
the few countries that went into a nation-wide lockdown post consumer spending dropped by −11.3 percent and gross fixed
the pandemic, and after that, the economy unlocked in phases capital investment by −7.3 percent. The falling volume of global
during these two quarters. Mobility restrictions and social trade reduced exports by −1.5 percent, but the decline was
distancing led to unparalleled supply-chain disruptions and significantly lower than the previous five quarters. Falling
consumer demand fallout (figure 1). What is encouraging is that domestic demand and oil prices led imports to contract (−17.2
after a year over year (YoY) decline of 23.9 percent in Q1 FY2021, percent) faster than exports. Therefore, net exports added to
the economy contracted by 7.5 percent in Q2. This is because the GDP.
the recovery in Q2 turned out to be stronger than what was
anticipated by a majority of market analysts. On the industry side, manufacturing and agriculture sectors
reported marginal but positive growth. The manufacturing
Nevertheless, several downside risks persist, and it will be sector grew by 0.6 percent, while the agricultural sector
important to charter the probable medium-term growth maintained its growth momentum at 3.4 percent. The services
outlook for the economy. We project growth that may sector, which contributes 55 percent of the GDP contracted
rebound in double digits in FY2022 after a contraction in by −11.4 percent. As expected, the “trade, hotels, transport,
FY2021. However, GDP levels may continue to remain below communication, and services related to broadcasting” were
projected levels at pre-pandemic growth rates during our the hardest-hit services sub-sectors that contracted by −15.6
forecast horizon. percent. That said, the “financial, real estate, and professional
services” sub-sectors contracted by −8.1 percent, which was
Coming to the analysis of the second quarter GDP, the higher than the contraction in Q1. This suggests a lagged impact
contraction may have turned out to be better than market of the pandemic on the financial sector, even as remote working
expectations. However the devil lies in the details. On the due to intermittent lockdowns continued to impact professional
demand side, the quarter saw its first sharp contraction services. The “public administration, defence, and other
of 22.2 percent in government spending (consumption + services” also registered a higher decline of −12.2 percent
investments) since Q4 FY2015, which is counterintuitive, given than in Q1.
01
India economic forecast: Could there be light at the end of this tunnel?
Figure 1. With GDP contracting for two consecutive quarters, India is technically in recession
0% YoY
30 The four growth engines of real GDP
20
10
0
-10
-20
-30
Private consumption Government consumption
-40 Total fixed investment Exports, goods, and services
-50
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
FY 2018 FY 2019 FY 2020 FY 2021
Source: Center for monitoring Indian economy, Deloitte Research, December 2020,
With such a large contraction in the first half of the fiscal year, data is released with a two-month lag, we should look at these
expecting a contraction for this entire fiscal year relative to numbers in the rear-view mirror, keeping in perspective what
the previous is discernible. The concerning question is if the recent high-frequency data is implying and we do have both
economy is on the path to recovery. Since the quarterly GDP good and bad news.
02
India economic forecast: Could there be light at the end of this tunnel?
The good and the bad...
The good news is that high-frequency data suggests that services suggest expansion (above 50; figure 2). Stronger car
economic activity has been picking up pace lately. Since sales, rising finished steel production and diesel consumption,
September, restrictions on inter-state movements were and higher goods and services tax revenue collections suggest
lifted to ensure mobility of goods, thereby easing supply-side that even though economic activities are still below pre-
pressures. This is also reflected in the industrial activity pick-up. COVID-19 levels, pent-up demand and festivities have added to
The Purchasing Managers’ Indices (PMI) for both industry and buoyancy in economic activity.
Figure 2. Economic activity is resuming, buoyed by pent-up demand and festival-related spending
Purchasing Manager’s Index (PMI)
Index
70
Manufacturing PMI Services PMI
60
50
40
30
20
10
0
Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
Source: Center for monitoring Indian economy, Deloitte Research, December 2020,
03India economic forecast: Could there be light at the end of this tunnel?
The bad news is that significant uncertainties linger on demand sustainability. People’s movement remains restricted due to fewer
flights and trains plying across states. The google mobility index suggests that mobility in residential areas improved relative to
February, but people have been avoiding parks, recreational areas, and transit stations as they are worried about falling sick
(figure 3). Evidently, high infection rates and health-related anxieties are keeping consumers from spending on travel, entertainment,
and leisure.
Figure 3. Mobility is improving around residential places and for essential needs only
% change India mobility indicator (average percentage change from the baseline)
40
20
0
-20
-40
-60
-80
March April May June July August Sep Oct Nov (Till 27 Nov)
-100
Retail and Grocery and Parks Transit stations Workplaces Residential
recreation pharmacy
Note: The baseline is the movement in February which is set to 0.
Source: Center for monitoring Indian economy, Deloitte Research, December 2020,
The purchasing power of consumers has been impacted as well. The extent of a falling unemployment rate since April and May, as
seen in figure 4, is desirable. However, concluding that we are “well into the usual” about the labour market should be taken with a
pinch of salt. Labour force participation has been on a decline, indicating that a large segment of the working population is now out
of the labour market and discouraged from looking for jobs. The number of people who feel wealthier, compared with last year, has
declined sharply. In other words, the negative wealth effect could be impacting their ability to spend more.
Figure 4. Labour market remains weak
% change The labour market
40
Unemployment rate
35 Percentage of people who think their income has gone up since last year
30
25
20
15
10
5
0
Jan-2020 Feb-2020 Mar-2020 Apr-2020 May-2020 Jun-2020 Jul-2020 Aug-2020 Sep-2020 Oct-2020 Nov-2020
Source: Center for monitoring Indian economy, Deloitte Research, December 2020,
04India economic forecast: Could there be light at the end of this tunnel?
Besides, inflation has remained persistently high, even if one excludes the prices of food and fuel (figure 5). High inflation
expectations and transport disruptions are keeping prices high. While one might expect food prices to decline with easing supply-
side disruptions, sticky core prices may impact demand for essential products, which is already low.
Figure 5. Prices have remained sticky downwards
% YoY Consumer price inflation
16
CPI: overall Core Food
14
12
10
8
6
4
2
0
Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20
Source: Center for monitoring Indian economy, Deloitte Research, December 2020,
Optimism amongst businesses after the easing of movement restrictions, and the anxiety of consumers about health and finance
are aptly reflected in their respective diverging sentiments in figure 6. While the business expectation index has improved since
September after a steep decline post the onset of the pandemic, the consumer confidence index shows no signs of recovery.
Figure 6. Consumer confidence remains weak while business expectations improve
Index Market sentiments
130
Consumer confidence index Business expectation index
120
110
100
90
80
70
60
50
40
Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Aug-20 Sep-20
Source: Center for monitoring Indian economy, Deloitte Research, December 2020,
05India economic forecast: Could there be light at the end of this tunnel?
…but, not so ugly
If high inflation persists, the RBI may decide not to reduce Mobility restrictions, social distancing, and low income have
policy rates in the next few months. This could hurt businesses, translated into higher savings amongst consumers across all
especially small and medium enterprises and those in the income classes. Demand for discretionary goods, which is also
informal sector that continue to face high borrowing interest highly elastic in nature, has remained low for a while. Once
rates on working capital. With consumer spending accounting infections come down significantly and people are confident
for close to 60 percent of the GDP, poor consumer confidence about moving out, pent-up demand for discretionary goods
and low income and wealth may lead to lower consumer will also pick up rapidly, especially amongst the top 10 income
spending. Low demand does not bode well for business percentile of the population. To catch up with the rising
confidence and capital investment. demand for discretionary goods, businesses will be compelled
to increase investments and hire quickly. This is because
Could these bad signals imply an uglier economic outlook? Not prolonged low investments (for over six quarters or more)
necessarily. would have affected capacity constraints and inventory levels.
One of the biggest challenges to the low demand and Lastly, stimulus measures and reforms announced by the
supply equilibrium that we are witnessing, is the high levels government and liquidity measures by the RBI may prop up
of infection and fear amongst consumers of falling sick. industrial activity and demand. The nature of the measures and
Fortunately, there exist drugs that reduce the recovery time reforms announced is such that their impact could come to the
or prevent the disease from developing into criticality in a fore with a certain lag and even coincide with the time when
majority of the cases. Recently, encouraging news about infection rates are significantly low and consumers are out to
several vaccines and their high effectiveness suggest that there spend, thereby boosting the recovery process further.
is possibly light at the end of this tunnel, and that we may have
an end date to the pandemic, even if it may not be immediate. What is common about all the above suppositions is that the
These are likely to have a positive impact on consumer arguments hinge on reduced infections and increased mobility.
confidence going forward. In short, there is likely to be pain in the short term, but the
outlook in the medium term may improve significantly.
06India economic forecast: Could there be light at the end of this tunnel?
The outlook – what lies ahead
Based on recent data and signals, we decided to update our projections for the medium term. We had released our last
publication on scenarios in July. We continue to assume that five factors (as explained in our July publication)ii will most likely
shape the path to recovery, as listed in figure 7.
Figure 7. The five factors that will determine the pace of the economic rebound
Availability of The secondary People’s
treatment and industry impact perception and
vaccine trust
Government’s The demand
policy stimulus recovery
Source: Deloitte Research, December 2020
07India economic forecast: Could there be light at the end of this tunnel?
We foresee three scenarios panning out in the future, ranging Scenario 3 is the most pessimistic prediction where the
from optimism to extreme pessimism. economy suffers several outbreaks and reinfections leading
to a second major lockdown in March 2021. Vaccines largely
Scenario 1 is where the economy rebounds strongly in FY2022, remain ineffective, besides being unavailable. Government
as we expect several effective vaccines to be out and available. resources are majorly directed towards saving lives and
The regional spurts in infection may also start tapering from June livelihood. India barely reaches pre-COVID-19 levels at the end
2021. Total active infection cases begin to come down reasonably of our forecast period, which is till FY2023.
by August and there are no further outbreaks. The stimulus and
reforms come into play with ripple effects across sectors. We Figure 8 compares GDP levels under the three scenarios.
expect the economy to reach pre-crisis levels by Q3 FY2022 (Oct- After a contraction in FY2021, the economy strongly bounces
Dec 2021) and revive at a sustainable pace thereafter. back in FY2022 under Scenario 1 and 2. This is because
of the low-base effect in FY2021 and also because Milton
Scenario 2 is where regional infections, especially in urban Friedman’s plucking theory plays out. iii The theory suggests
cities, continue to be high and lockdowns keep getting that recessions are negative events that pull the economy
intensive. A vaccine is not available to the population till the down and after it, the economy bounces back up. The pace
end of 2021, while people remain sceptical of the vaccine of the rebound is proportional to the depth of the recession.
effectiveness. The government is limited by its resources, Even under Scenario 3, where the economy continues to
and capital expenditure and infrastructure spend take a hit. reel under infection in FY2022, the year manages to grow
Reforms take more time to impact. We expect the economy to modestly.
reach pre-crisis levels in early FY2023.
Figure 8. GDP projections under the three scenarios suggest output to remain below pre-COVID-19 GDP levels
Real GDP
No COVID-19 growth Scenario 1: controlled outbreak and effective stimulus
INR billion
Scenario 2: controlled outbreak but high Scenario 3: multiple outbreak, with partially-
infection, limited stimulus effective stimulus
46000
Forecasts
41000
Pre-COVID-19
36000
31000
26000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
FY 2020 FY 2021 FY 2022 FY 2023
Scenario 1 -8.3 11.7 7.5
Scenario 2 4.2 -10.6 9.5 9.4
Scenario 3 -9.1 4.5 5.8
Source: Deloitte Research, December 2020
08India economic forecast: Could there be light at the end of this tunnel?
The rebound in FY2022 is the strongest and quickest in remain below the pre-pandemic GDP levels. Assuming that
Scenario 1. Quick access to several alternative vaccines to the there is a higher likelihood of Scenario 1 or 2, we expect growth
vulnerable segments of the population will likely break the to range between 9.5 percent to 11.7 percent in FY2022.
infection chain faster. Not only will reduced infection improve
consumer confidence, the buoyancy impact of government Prices are expected to ease till mid-2021 because of low
spending could also coincide with the economic recovery in demand and low supply equilibrium but rise quickly as soon
FY2022 in this scenario. However, we also expect some delay as infection rates are under control. This is because demand
in private spending due to crowding out because of which, overshoots supply in a very short time span in Scenario 1
growth momentum would slack in the following year. Under and 2 (figure 9), though inflation is lagged by a few quarters
Scenario 2, private spending picks up momentum faster, as in scenario 2. Prolonged low investments leading to capacity
soon as infection rates fall, because low government spending constraints and reduced inventories fail to meet a strong
compels private investments to meet the gap. The economy rebound in durable goods, leading to stronger core prices.
sees significant growth for several quarters in Scenario 2, albeit
a bit deferred relative to Scenario 1. Scenario 3 is our highly pessimistic outlook of the economy and
we do not expect it to materialise. This is a scenario where low
That said, stronger growth rates in FY2022 could be deceptive. demand and low supply equilibrium result in low growth and
Despite a quicker rebound even in Scenario 1, the output levels prices throughout our forecast period.
Figure 9. Prices rise faster as demand outpaces supply under Scenario 1 and 2
CPI under three scenarios
Scenario 1: Controlled outbreak and Scenario 2: Controlled outbreak but Scenario 3: Multiple outbreak,
% YoY effective stimulus high infection, limited stimulus with partially-effective stimulus
9
7
5
3
1
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2020 FY 2021 FY 2022 FY 2023
FY 2020 FY 2021 FY 2022 FY 2023
Scenario 1 6.0 5.2 5.7
Scenario 2 4.8 6.0 3.8 6.0
Scenario 3 5.8 2.7 4.1
Source: Deloitte Research, December 2020
09India economic forecast: Could there be light at the end of this tunnel?
The fiscal deficit worsens in the initial years because of low growth leading to lower tax revenues and higher government
spending. A stronger rebound in Scenario 1 helps the government to improve its fiscal and debt situation in the years ahead, while
the economy gets trapped in high deficit and high debt under Scenario 3. The government is in the best position to consolidate in
the medium term under Scenario 2 (figure 10).
Figure 10. The fiscal deficit is expected to be high in FY2021 due to low growth and high government spending
Fiscal deficit under three scenarios
% GDP
Scenario 1: Controlled outbreak Scenario 2: Controlled outbreak Scenario 3: Multiple outbreak,
and effective stimulus but high infection, limited stimulus with partially-effective stimulus
0
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
-2
-4
-6
-8
-10
-12
Source: Deloitte Research, December 2020
Undoubtedly, there lie uncertainties in the path to recovery. the possibility of the release of several vaccines give us hope
These scenario projections are ways to anticipate probable of a stronger and faster rebound. Even though we may lose a
outcomes and keep our eyes on the road ahead, as we look at couple of years of high growth to the pandemic, we prefer to
the past two quarters' GDP numbers in the rear-view mirror. be an optimist at this time point of time and view the glass as
Recent developments, such as low fatality rates in India and half full.
i
CMIE database
ii
Rumki Majumdar, "COVID-19: Indian economic forecast amidst uncertainties, Deloitte India", July 2020, https://www2.deloitte.com/in/en/pages/about-
deloitte/articles/indian-economic-forecast-amid-covid.html
iii
Noah Smith, “Milton Friedman Got Another Big Idea Right”, Bloomberg, November 4, 2019
https://www.bloomberg.com/opinion/articles/2019-11-04/milton-friedman-s-plucking-theory-of-recessions-looks-right
10India economic forecast: Could there be light at the end of this tunnel?
Connect with us
Dr. Rumki Majumdar
Economist
rumajumdar@deloitte.com
11Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. This material is prepared by Deloitte Touche Tohmatsu India LLP (DTTILLP). This material (including any information contained in it) is intended to provide general information on a particular subject(s) and is not an exhaustive treatment of such subject(s) or a substitute to obtaining professional services or advice. This material may contain information sourced from publicly available information or other third party sources. DTTILLP does not independently verify any such sources and is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such sources. None of DTTILLP, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this material, rendering any kind of investment, legal or other professional advice or services. You should seek specific advice of the relevant professional(s) for these kind of services. This material or information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person or entity by reason of access to, use of or reliance on, this material. By using this material or any information contained in it, the user accepts this entire notice and terms of use. © 2020 Deloitte Touche Tohmatsu India LLP.
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