GDP growth likely to turn positive in third quarter, says think tank

Having witnessed a contraction in the first half of the current financial year, India's GDP growth is likely to turn positive at 0.1 per cent in the October-December quarter, economic think-tank NCAER said.

The NCAER, in its mid-year review of the Indian economy, also forecast 2 per cent growth in the fourth quarter (January-March 2021). The overall contraction in the current fiscal is likely to be contained at 7.3 per cent.

India's economy contracted by 23.9 per cent in the first quarter of the current fiscal on the account of the impact of the coronavirus pandemic. The contraction narrowed to 7.5 per cent in the second quarter.

"The sharp recovery of GDP in Q2, the bowstring effect, was a welcome surprise. We have accordingly revised our forecast of annual contraction to (-) 7.3 per cent. The revised growth forecasts for Q3 and Q4 are 0.1 per cent and 2 per cent respectively," the NCAER's mid-year economic review said.

Earlier, the NCAER had estimated the GDP contraction for the full year at 12.6 per cent.

It further said the ongoing recovery notwithstanding, the long term effect of sharp contraction in 2020-21 is likely to be long-lasting.

The economy will have to grow at more than the previous trend rate for it to catch up with its pre-pandemic growth path, it said.

"Conventional macroeconomic policies alone will not do. These will have to be supported by deep and wide ranging reforms, especially in the financial sector, power and foreign trade.

"Additional reforms in health, education, labour and land are also urgent, but these will require close coordination between the Centre and states in a spirit of cooperative federalism since these are in the main State subjects in the 7th Schedule of the Constitution," the think-tank added.

NCAER also estimated that the combined fiscal deficit of the Centre plus states will amount to over 14 per cent of GDP for the full financial year after factoring in the projected 7.3 per cent economic contraction.

"Even if we count only the fiscal impulse, i.e., the excess of the 2020-21 fiscal deficit over that of 2019-20, this amounts to a stimulus of over 7 per cent of GDP.

"Taken together with RBI liquidity infusion of well over 6 per cent of GDP, this translates to a very significant total stimulus that compares well with most emerging market economies," it said.

Nevertheless, the fiscal stimulus could have been much more effective on several counts, it added.