India Is Headed for a Technical Recession — and the Road to Recovery Will Be Long, Analysts Say

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  • India has a "very, very long" distance to go toward a full recovery or even trying to recover the growth that had been lost in the last six months, according to JPMorgan's chief emerging markets economist Jahangir Aziz.
  • Economists in a Reuters poll predicted that India's economy shrunk 8.8% in the September quarter.
  • The Reserve Bank of India last month said manufacturing — particularly consumer non-durables, and some categories of services like passenger vehicles and railway freights — have gradually recovered in the second quarter.

SINGAPORE — India's economy is expected to improve in the quarter ending in September, compared to the record drop in growth in the previous three months. Still, analysts say it will be a long road to recovery.

Gross domestic product for the July-September period — India's fiscal second quarter — will be released on Friday. The South Asian country's fiscal year begins in April and ends in March the following year.

Economists polled by Reuters predicted that India's economy shrank 8.8% in the quarter ending in September. They expect GDP to also fall in the October to December quarter, followed by a 0.5% expansion between January to March.

If Friday's GDP print indicates a contraction, as is widely expected, it would put India into a technical recession — which is defined as two consecutive quarters of negative growth.

Jahangir Aziz, chief emerging markets economist at JPMorgan, said the investment bank is somewhat more optimistic than the consensus estimate for India's second-quarter GDP print.

"We think it's somewhere between 7.5% and 8% (contraction)," he said Friday on CNBC's "Squawk Box Asia." He explained that high-frequency data indicated that the economy fared slightly better than the 8.8% decline economists are expecting.

"It's an improvement but it's a very, very long distance to go towards full recovery or even trying to recover the growth that has been lost in these last six months," Aziz added.

Permanent scarring

India's economy was already facing challenges with consumer demand and prolonged difficulties in the banking sector when the coronavirus pandemic hit. The country went into a national lockdown between late-March and May in an attempt to slow the spread of the virus.

That essentially led to a collapse in private consumption and investment demand, leading to significant job and income losses that created uncertainties and further curtailed spending.

"While most countries responded to the pandemic with a mix of fiscal and monetary policy, India's response was largely monetary and only slightly fiscal," said Kunal Kumar Kundu, India economist at Societe Generale.

India announced several policy measures in recent months, including a near $10 billion package in October to prop up the economy, but economists were largely unimpressed.

JPMorgan's Aziz said all policymakers, including those in other countries, are looking at whether or not this pandemic will leave behind permanent scars on their economies. He said that with India's current trajectory, by the end of 2021, South Asia's largest economy would still be some way off from where it could have been if the pandemic did not happen.

"The fear of permanent scarring is what, I think, is keeping almost all policymakers awake at night," Aziz said. "In this instance, India's rather reticent fiscal support, I think, could end up playing a big part in making that permanent scar even deeper than it should have been."

'Difficult' road to recovery

Kundu said in a note that "inadequate fiscal response" has resulted in the lockdown failing to flatten the infection curve. He also said those measure would likely flatten the economic recovery curve as only a few of them are expected to have a positive immediate impact.

He added that he's expecting an uneven recovery path. Some businesses and sectors will emerge stronger but the rest — including most micro, small and medium businesses in the informal sector — would struggle even in the medium term.

"In absolute terms, we are quite bearish on India's macro conditions in the short and medium term, though we are more constructive on the longer-term prospects," Kundu wrote.

In relative terms, "India could still emerge as one of the fastest-growing economies despite weakened growth potential," he added.

The Reserve Bank of India last month said in its monetary policy statement that manufacturing, particularly consumer non-durables, and some categories of services like passenger vehicles and railway freights have gradually recovered in the second quarter, cushioned by government spending and rural demand. The outlook for agriculture was robust as well, according to the central bank.

Still, some economists believe that GDP is likely to undershoot the recovery suggested by the industrial sector for several reasons.

"While it is easier to restart supply-side production, demand conditions are slower to revive amid pandemic conditions. More so, with sticky cost-push inflation led by food undermining discretionary spending power even more," Lavanya Venkateswaran, an economist at Mizuho Bank's Asia & Oceania Treasury Department, said in a Friday note.

"Second, the inability to contain outbreaks also means that the domestic service sector remains somewhat more hampered in the normalization process," she said.

India's grey economy was also hit hard by the pandemic, which dampened the overall growth recovery as the informal sector faces harsher financial and cash-flow struggles, Venkateswaran explained.

India has reported the second highest number of coronavirus infections in the world, behind only the United States. The South Asian country has more than 9.26 million reported cases of Covid-19, according to data from Johns Hopkins University. More than 135,000 people have died but the rate of recovery in India remains relatively high.

JPMorgan's Aziz said he's worried that growth could also be hampered by a lack of credit as banks may be hesitant to lend to households and businesses that are highly leveraged.

"My fear is that because, again, the lack of income support coming from India, from the government, I think will damage balance sheets of households, will damage balance sheets of (small and medium enterprises) and banks will find it very difficult to be able to provide credit especially when India grows," he said, adding that it is going to be a "very difficult ride" in 2021-2022.

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