India out of recession — is the worst over?

GDP to drop 8% this year but still reasons for caution persist

After two straight quarters of economic contraction, sentiments eased after India reported growth in the last quarter of 2020, but economists were eyeing how recovery will look like in 2021.

India’s quarterly GDP increased 0.4 per cent, while estimating that real GDP in the financial year 2020-21 will decline 8 per cent, as compared to 4 per cent growth in the previous fiscal

“We doubt that GDP will be back on the pre-virus trend any time soon,” noted Shilan Shah, senior India economist in Singapore. “As such, monetary policy will remain loose for a long time to come.”

Indian GDP data released on Friday indicated only a small contraction in annual growth in the last quarter of 2020, and high-frequency indicators have been pointing to a relatively strong start to 2021.

India’s central bank has sought to also retain its current inflation target of 4 per cent, saying it is appropriate for the next five year.

Debate over inflation target

“The debate over the RBI’s 4 per cent headline inflation target — which runs until next month and is currently being reviewed — had heated up this week,” wrote Shah.

“Some prominent government officials have suggested that the central bank should switch to target core inflation, while a paper authored by RBI officials released today makes the case for maintaining the existing target,” Shah added.

The coronavirus pandemic has stifled economic growth and led to job losses, but analysts have been expecting the economy to grow somewhat faster than estimated over the medium term.

“Indeed, our in-house mobility tracker suggests that activity has returned to pre-pandemic levels,” evaluated Darren Aw, Asia economist at Capital Economics. “The outlook has improved too as fiscal policy has been loosened significantly. That all being said, there are still reasons for caution.”