The National Council for Applied Economic Research (NCAER) has projected that the Indian economy would contract 12.6% this fiscal year, a massive downgrade from the 1.2% growth it had estimated in June.
Growth would remain negative throughout the fiscal year, the think tank said in its Quarterly Review of the Economy report for the July-September quarter, released on Friday.
The second quarter would see a 12.7% contraction, followed by an 8.6% fall in the third and a 6.2% decline in the fourth quarters, the report said.
Highlighting the uncertainty of a longer-term outlook, it said, “The key question is how the economy will perform thereafter. References to V-shaped recovery, etc., obfuscate more than they reveal.”
India’s GDP is unlikely until the end of 2022-23 to reach the peak output levels seen in the previous fiscal year, it said, noting that this was under the “optimistic” assumption of 7% growth in FY22.
“A more likely scenario is that after getting back to its previous peak output level by 2022-23 the economy will settle back to its pre-pandemic growth path of 5.8%,” the NCAER said.
The report pegged inflation for the second quarter at 6.6% and only marginally lower at 6.5% for the fiscal year, both beyond the Reserve Bank of India’s tolerance band of 2-6%.
Coupled with the steep economic contraction, this made the conventional approach to monetary and fiscal policy inadequate to deal with the crisis, it said.
On the fiscal side, it estimated the combined fiscal deficit at 13% of gross domestic product, along with a total public sector borrowing requirement of 14-15% of GDP.
This would put pressure on the RBI, which has to enable markets to absorb this massive borrowing requirement while avoiding a spike in bond yields.
“It seems inevitable that at least a part of this borrowing will have to be monetised to avoid excessive pressure and crowding out in the financial markets,” the report said.
This called for wide-ranging reforms that were “no less ambitious than the reforms of 1991”, the think tank said. The government should focus on maintaining the stability of the financial sector through stronger supervision of banks and financial institutions, it said.
It recommended resolution of non-performing assets through the creation of a bad bank, partial disinvestment and governance reforms in public sector banks and more effective incentives to induce lending to micro, small and medium enterprises.