India's growth rates likely to rebound quite strongly next year

Leading global investment bank Goldman Sachs has projected a more than 15 per cent GDP expansion for India in the next fiscal. And strong farm sector growth and rising rural prosperity could temper the blow of the massive economic contraction in the first quarter of the current fiscal.

Skimming through Indian newspapers and news portals one can be forgiven for thinking the Indian economy has fallen off the cliff. Following a 23.9 per cent contraction in GDP in the first quarter of the current fiscal (April-June 2020), global agency Fitch Ratings has forecast a 10.5 per cent contraction in India's GDP during 2020-21. That's a massive $300 billion in lost production, livelihoods and income. But dig a little deeper and extend the time horizon a little longer and the picture begins to look less gloomy.

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Green shoots are already visible

Even if the outlook for the current year looks poor, one of the world's leading investment banks, Goldman Sachs, has forecast a full-blown economic recovery next year. Other indicators such as the IHS Markit Purchasing Manager's Index and the Nomura Business Resumption Index, show some green shoots are already visible in the economy, giving rise to optimism that an uptick in growth rates in the second, third and fourth quarters of the year will significantly temper the impact of the massive de-growth witnessed in the first quarter and ensure that 2020-21 is not a complete washout.

In fact, Goldman Sachs has projected a growth of a massive 27.1 per cent in the first quarter of the next financial year due to a favourable base effect and the full reopening of the economy.

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Base effect to result in steroid-charged growth next year

It must be borne in mind that the near 24 per cent contraction in the Indian economy in Q1 of the current fiscal has come on the back of an almost total lockdown. Some estimates put the lockdown at 65 per cent, making it the most stringent in the world.

The Goldman Sachs study estimates India to log a growth rate of 9.9 per cent in calendar year 2021 and 15.7 per cent in the coming fiscal as economic activity across all sectors returns to normal. However, total output in real terms for the coming fiscal is still expected to be about 2 per cent less than the GDP clocked in the ended March 2020, which means, in effect, that the Covid-19 pandemic will cost India about two years of growth.

The expected economic rebound in the second half of this financial year will be led by agriculture and rising rural prosperity of which there are already some signs.

Rural India could temper the shocks

Many Indian analysts tend to focus too much on urban India and ignore the fact that the contribution of the rural consumers to India's GDP is almost the same as that of the urban ones. For example, besides growing crops that feed the country, rural India also supports half the sales of motorcycles, bicycles, almost the entire sales of tractors, more than 40 per cent of the demand for steel and cement and a significant proportion of the sale of automobiles, garments and apparel, televisions, mobile phones and a host of other products and services.

This year is likely to be particularly bountiful for rural India. The Covid-19 outbreak hasn't really affected the rural population much. Then, record procurement of the winter crop and release of a tranche of the Prime Minister's income guarantee scheme for farmers has injected at least $15 billion into the rural economy. And a bountiful monsoon this year - very important as more than half the farms in India don't have irrigation facilities and depend on monsoon rains for water - is expected to result in another bumper harvest leading to more purchasing power and higher levels of consumption outside of the big metros and large towns.

Don't write off the economy yet

So, a good monsoon has a positive impact on the entire economy and large parts of the value chain that sustains India's fast-growing urban population.

So, it will not be prudent to write off India's growth prospects even if the noise surrounding the economy is mostly negative.