India economic

forecast: Could
there be light at the
end of this tunnel?
December 2020
Brochure / report title goes here |
 Section title goes here

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

Second-quarter GDP data
reveals interesting conundrums
COVID-19 has weighed down on economic growth in the first
two quarters of FY2021, which is no surprise. India was amongst
the few countries that went into a nation-wide lockdown post
the pandemic, and after that, the economy unlocked in phases
during these two quarters. Mobility restrictions and social
distancing led to unparalleled supply-chain disruptions and
consumer demand fallout (figure 1). What is encouraging is that
after a year over year (YoY) decline of 23.9 percent in Q1 FY2021,
the economy contracted by 7.5 percent in Q2. This is because
the recovery in Q2 turned out to be stronger than what was
anticipated by a majority of market analysts.
Nevertheless, several downside risks persist, and it will be
important to charter the probable medium-term growth
outlook for the economy. We project growth that may
rebound in double digits in FY2022 after a contraction in
FY2021. However, GDP levels may continue to remain below
projected levels at pre-pandemic growth rates during our
forecast horizon.
Coming to the analysis of the second quarter GDP, the
contraction may have turned out to be better than market
expectations. However the devil lies in the details. On the
demand side, the quarter saw its first sharp contraction
of 22.2 percent in government spending (consumption +
investments) since Q4 FY2015, which is counterintuitive, given
India economic forecast: Could there be light at the end of this tunnel?
rising government spending since the pandemic. Private
domestic demand contracted, but not as much as in Q1. Private
consumer spending dropped by −11.3 percent and gross fixed
capital investment by −7.3 percent. The falling volume of global
trade reduced exports by −1.5 percent, but the decline was
significantly lower than the previous five quarters. Falling
domestic demand and oil prices led imports to contract (−17.2
percent) faster than exports. Therefore, net exports added to
the GDP.
On the industry side, manufacturing and agriculture sectors
reported marginal but positive growth. The manufacturing
sector grew by 0.6 percent, while the agricultural sector
maintained its growth momentum at 3.4 percent. The services
sector, which contributes 55 percent of the GDP contracted
by −11.4 percent. As expected, the “trade, hotels, transport,
communication, and services related to broadcasting” were
the hardest-hit services sub-sectors that contracted by −15.6
percent. That said, the “financial, real estate, and professional
services” sub-sectors contracted by −8.1 percent, which was
higher than the contraction in Q1. This suggests a lagged impact
of the pandemic on the financial sector, even as remote working
due to intermittent lockdowns continued to impact professional
services. The “public administration, defence, and other
services” also registered a higher decline of −12.2 percent
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

-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
economic activity has been picking up pace lately. Since
September, restrictions on inter-state movements were
lifted to ensure mobility of goods, thereby easing supply-side
pressures. This is also reflected in the industrial activity pick-up.
The Purchasing Managers’ Indices (PMI) for both industry and
services suggest expansion (above 50; figure 2). Stronger car
sales, rising finished steel production and diesel consumption,
and higher goods and services tax revenue collections suggest
that even though economic activities are still below pre-
COVID-19 levels, pent-up demand and festivities have added to
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,

03
India 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

-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

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,

04
 India 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

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,
05
India 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
policy rates in the next few months. This could hurt businesses,
especially small and medium enterprises and those in the
informal sector that continue to face high borrowing interest
rates on working capital. With consumer spending accounting
for close to 60 percent of the GDP, poor consumer confidence
and low income and wealth may lead to lower consumer
spending. Low demand does not bode well for business
confidence and capital investment.
Could these bad signals imply an uglier economic outlook? Not
necessarily.
One of the biggest challenges to the low demand and
supply equilibrium that we are witnessing, is the high levels
of infection and fear amongst consumers of falling sick.
Fortunately, there exist drugs that reduce the recovery time
or prevent the disease from developing into criticality in a
majority of the cases. Recently, encouraging news about
several vaccines and their high effectiveness suggest that there
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.
These are likely to have a positive impact on consumer
confidence going forward.
06
Mobility restrictions, social distancing, and low income have
translated into higher savings amongst consumers across all
income classes. Demand for discretionary goods, which is also
highly elastic in nature, has remained low for a while. Once
infections come down significantly and people are confident
about moving out, pent-up demand for discretionary goods
will also pick up rapidly, especially amongst the top 10 income
percentile of the population. To catch up with the rising
demand for discretionary goods, businesses will be compelled
to increase investments and hire quickly. This is because
prolonged low investments (for over six quarters or more)
would have affected capacity constraints and inventory levels.
Lastly, stimulus measures and reforms announced by the
government and liquidity measures by the RBI may prop up
industrial activity and demand. The nature of the measures and
reforms announced is such that their impact could come to the
fore with a certain lag and even coincide with the time when
infection rates are significantly low and consumers are out to
spend, thereby boosting the recovery process further.
What is common about all the above suppositions is that the
arguments hinge on reduced infections and increased mobility.
In short, there is likely to be pain in the short term, but the
outlook in the medium term may improve significantly.
 India 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

07
India economic forecast: Could there be light at the end of this tunnel?

We foresee three scenarios panning out in the future, ranging
from optimism to extreme pessimism.
Scenario 1 is where the economy rebounds strongly in FY2022,
as we expect several effective vaccines to be out and available.
The regional spurts in infection may also start tapering from June
2021. Total active infection cases begin to come down reasonably
by August and there are no further outbreaks. The stimulus and
reforms come into play with ripple effects across sectors. We
expect the economy to reach pre-crisis levels by Q3 FY2022 (Oct-
Dec 2021) and revive at a sustainable pace thereafter.
Scenario 2 is where regional infections, especially in urban
cities, continue to be high and lockdowns keep getting
intensive. A vaccine is not available to the population till the
end of 2021, while people remain sceptical of the vaccine
effectiveness. The government is limited by its resources,
and capital expenditure and infrastructure spend take a hit.
Reforms take more time to impact. We expect the economy to
reach pre-crisis levels in early FY2023.
Scenario 3 is the most pessimistic prediction where the
economy suffers several outbreaks and reinfections leading
to a second major lockdown in March 2021. Vaccines largely
remain ineffective, besides being unavailable. Government
resources are majorly directed towards saving lives and
livelihood. India barely reaches pre-COVID-19 levels at the end
of our forecast period, which is till FY2023.
Figure 8 compares GDP levels under the three scenarios.
After a contraction in FY2021, the economy strongly bounces
back in FY2022 under Scenario 1 and 2. This is because
of the low-base effect in FY2021 and also because Milton
Friedman’s plucking theory plays out. iii The theory suggests
that recessions are negative events that pull the economy
down and after it, the economy bounces back up. The pace
of the rebound is proportional to the depth of the recession.
Even under Scenario 3, where the economy continues to
reel under infection in FY2022, the year manages to grow
modestly.

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

08
 India economic forecast: Could there be light at the end of this tunnel?

The rebound in FY2022 is the strongest and quickest in
Scenario 1. Quick access to several alternative vaccines to the
vulnerable segments of the population will likely break the
infection chain faster. Not only will reduced infection improve
consumer confidence, the buoyancy impact of government
spending could also coincide with the economic recovery in
FY2022 in this scenario. However, we also expect some delay
in private spending due to crowding out because of which,
growth momentum would slack in the following year. Under
Scenario 2, private spending picks up momentum faster, as
soon as infection rates fall, because low government spending
compels private investments to meet the gap. The economy
sees significant growth for several quarters in Scenario 2, albeit
a bit deferred relative to Scenario 1.
That said, stronger growth rates in FY2022 could be deceptive.
Despite a quicker rebound even in Scenario 1, the output levels
remain below the pre-pandemic GDP levels. Assuming that
there is a higher likelihood of Scenario 1 or 2, we expect growth
to range between 9.5 percent to 11.7 percent in FY2022.
Prices are expected to ease till mid-2021 because of low
demand and low supply equilibrium but rise quickly as soon
as infection rates are under control. This is because demand
overshoots supply in a very short time span in Scenario 1
and 2 (figure 9), though inflation is lagged by a few quarters
in scenario 2. Prolonged low investments leading to capacity
constraints and reduced inventories fail to meet a strong
rebound in durable goods, leading to stronger core prices.
Scenario 3 is our highly pessimistic outlook of the economy and
we do not expect it to materialise. This is a scenario where low
demand and low supply equilibrium result in low growth and
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

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

09
India 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.
These scenario projections are ways to anticipate probable
outcomes and keep our eyes on the road ahead, as we look at
the past two quarters' GDP numbers in the rear-view mirror.
Recent developments, such as low fatality rates in India and
the possibility of the release of several vaccines give us hope
of a stronger and faster rebound. Even though we may lose a
couple of years of high growth to the pandemic, we prefer to
be an optimist at this time point of time and view the glass as
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

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 India economic forecast: Could there be light at the end of this tunnel?

Connect with us
Dr. Rumki Majumdar
Economist
rumajumdar@deloitte.com

11
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