India — COVID-19 drives record recession, drawn out recovery likely

India’s economic contraction in the second quarter was the largest on record and contributed to the worst performance among major global economies in the first half of 2020 (Chart). India’s economy was about 26% smaller in the April-June period of 2020 relative to the October-December quarter of 2019. Rising COVID-19 cases—above 90,000 per day on 17 September, the fastest growing in the world—will likely contribute to a drawn-out recovery. As long as the virus remains uncontained, consumers will remain cautious about spending and firms will remain reluctant to invest. Moreover, the mix of high public debt (above 70% of GDP), a low tax base, high inflation (6.7% year-on-year in August) and concerns about corporate debt and financial stability limit the ability of fiscal and monetary policymakers to stimulate the recovery. Beyond the pandemic and over the medium term, India’s growth is likely to be lower than the average 7% per annum rate achieved from 2010 to 2019. Reforms enacted during the pandemic to free up agricultural produce markets, ease tax compliance and simplify labour regulations mark major steps to support Indian economic growth over time.

Owing to weak demand, India’s share of Australia’s exports fell below 2% in the year to June 2020, the lowest in 17 years. Coal exports have slumped, in part because of decreased Indian manufacturing and steel production during the pandemic, while education-related travel has plunged due to international travel restrictions. India’s rank among Australia’s export markets has slipped to seventh, surpassed by the US, the UK and Taiwan while China, Japan and South Korea have surged further ahead as the top three export markets. Sluggish economic prospects will impact the trajectory of Australia-India trade volumes in the short- to medium-term. Merchandise exports of $10.2 billion in the year to July 2020 remain 36% below the level a year earlier. ‘Self-reliance’ has emerged as a theme of India’s economic recovery, including a focus on increasing domestic production.

Fig 3 Real GDP