India’s economy is likely to enter a recessionary phase for the first time ever in the second quarter (July-September) of the current financial year, with the Gross Domestic Product expected to contract by 8.6%, the Reserve Bank of India said in a bulletin released on Wednesday.  The RBI, however, said the economy will break out of contraction of the six months gone by and return to positive growth in the October-December quarter of 2020-21.

The worst affected were construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%).

In an article titled “State of the Economy”, the central bank in its bulletin, “nowcast” the contraction in the second quarter based on quarterly results declared by 887 non-financial listed companies, whose sales remained in contraction in the second quarter. “Nowcasting” is the prediction of the present or the very near future of the state of the economy.

The RBI, however, said the economy will break out of contraction of the six months gone by and return to positive growth in the October-December quarter of 2020-21. Incoming data for the month of October 2020 have brightened prospects and stirred up consumer and business confidence, it said.

“With the momentum of September having been sustained, there is optimism that the revival of economic activity is stronger than the mere satiation of pent-up demand released by unlocks and the rebuilding of inventories. If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in the third quarter (Q3) of 2020-21,” it said.

Apart from the price rise scare, the RBI flagged two more concerns, that of a second wave of the virus and a “stress intensifying among households and corporations that has been delayed but not mitigated”. The central bank said that a second wave of Covid-19 can have an effect on collapsing external demand, while the stress in households and corporations ran a risk of spilling over to the financial sector.

In August this year, the Central government had reported a 23.9 percent contraction in its Gross Domestic Product (GDP) for the April-June quarter. The RBI has ‘nowcast’ that GDP for the July-September quarter is set for a contraction of 8.6 percent.

‘Nowcasting’ is the prediction of the present or the very near future of the state of the economy. Moody’s have also revised India’s 2020 GDP target. According to them, a decline of 8.9% is expected now as against the previous forecast of 9.6%.

 

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