India may see 7.3% contraction if coronavirus strikes again: OECD

If it doesn't, the grouping of advanced countries in its twice-yearly publication-OECD Economic Outlook-- said that it expected India's economy to contract 3.7 per cent during the year.

The Organization for Economic Co-operation and Development (OECD) on Wednesday projected that India’s economy will contract 7.3 per cent in the current fiscal year if there is a second wave of the coronavirus (Covid-19) later this year. This is so far the steepest contraction that any agency has predicted for the country.

If there is no second wave, the grouping of advanced countries — in its OECD Economic Outlook — expects the economy to contract 3.7 per cent during the year. 

A renewed virus outbreak will require a new general shutdown in autumn. But the single-wave scenario assumes that the 10-week general lockdown, followed by some targeted curbs, will succeed in avoiding an acute health crisis.

However, growth during the next fiscal year would be higher at 8.1 per cent in case of a second wave and bit slower at 7.9 per cent if the virus recedes and remains under control.

The OECD said, “The poor, informal workers and small enterprises will suffer disproportionately; weak bank and corporate portfolio positions will keep the investment rate low, weighing on growth prospects.”

However, inflation remains under control, given the economic slack and low oil prices, it said. 

But, public deficit will spike, reflecting faltering tax receipts and spending is needed to support people, banks and small enterprises, the OECD cautioned.

The report said protecting human lives is the immediate priority and requires additional health care resources and generous support to the poor.

“Getting activity back and avoiding a durable effect from the crisis on income and jobs require promoting access to credit,” it said.

Bank recapitalisations and governance reforms should accompany government-backed guarantee schemes, the OECD added.

An inclusive growth strategy over the long run should include prioritising social investment and income support for the poor. This can be financed by reducing energy and fertiliser subsidies that mostly benefit the rich, it added. 

It can be also done by modernising labour and business regulations to promote quality job creation and extend the social safety net, the OECD suggested.

In the case of a double-hit by the pandemic, the OECD pegged global economic contraction at 7.6 per cent in 2020 and six per cent in case of a single-hit scenario. 

It said both scenarios are sobering, as economic activity cannot return to normal under these circumstances.

“By the end of 2021, the loss of income will exceed that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments,” the OECD said in its global outlook.

On spread of the virus in India, the OECD said despite early and strict containment measures, the virus is affecting many.

“The virus manifested itself from late January. Infections have been concentrated in large cities, in particular slums, with risk of a fast spread, given India’s high population density, poor housing conditions in some areas and large internal migration flows. The number of new cases is still rising as of early June,” it said.

It pointed out that high air pollution adds to the severity of cases while the population age structure — almost half of Indians are below 25 — has the opposite impact.

Human costs from the disease have been compounded by a shortage of health care resources, in particular, hospital beds, doctors, and testing facilities, it said.