India’s economy is now set to lose 10% of its gross domestic product (GDP), thanks to the after-effects of COVID-19. Eight states in India contribute to more than 50% of its GDP. Within these eight states, almost 42% of the state GDP is driven by areas that are now considered red zones.

How is it going to play out, and what is India’s overall economic prospect looking? We speak to D.K. Joshi, chief economist of the rating agency CRISIL.

Edited excerpts:

Tell us about your report that says, among other things, that this is the fourth recession since Independence and the first since Liberalisation.

If you look at the nature of recessions in the past, they were primarily agri-driven because agriculture is unirrigated; till date, almost half of agriculture is unirrigated. And irrigation was even weak at that time--50% of GDP used to come from agriculture and you had one bad monsoon, and then it would drive you into a recession. This was the pattern until about 1980.

I think this recession is different because agri is expected to do well. The monsoons are normal. This will be the first recession which is driven by non-agriculture sectors--a very sharp hit to both industry as well as services. That is what makes it different. This is also telling you about how the structure of the economy has evolved over a period of time. Share of agriculture has reduced. It doesn’t have the muscle to create a recession anymore. It is the non-agriculture sectors that matter, and right now, they are the ones which are hit very deeply and that is why we end up with this recession.

[Editor’s note: A June 4, 2020, report from CRISIL said agriculture and allied activities could be “the Indian economy’s only bright spot in a year when the COVID-19 pandemic has slammed the brakes on industry and services”.]

Just a month ago, you were predicting a 4% erosion of GDP. Now it's 10%. Why has this number changed so dramatically?

At that juncture, we were in the second phase of lockdown, and our hypothesis or assumption was that it [the pandemic] will peak out in May [2020]. But that has not played out and the lockdowns have become more intense, in the sense that if you carry on with the lockdown, I think it has a non-linear kind of effect, the buffers keep eroding the more you get into the lockdown.

So, from that perspective, I think the lockdown--even if you release some parts of the economy--still remains an issue as far as the economic activity is concerned. One big difference has been that the containment measures have continued much more than we expected. The second reason is that the economic package that the government announced, I think, is less than what we were baking into our assumptions.

So, both these things put together--the containment measure having a larger weight in our assessment--has led to a sharp revision of GDP. And let me be candid about it. We are also learning about the process and as and when things happen, you keep factoring in new information and reassessing. This is a very difficult phase for the economy and extremely difficult phase for the forecasters as well to assess how things will play out. You will see continuous reassessments across the board happening, as far as the economy is concerned.

So, when you reassess, what are the two or three things that you are watching most for, as your lead indicators?

The first thing that we watch out for is how the virus is behaving, because that is the mother of all problems. The shape of economic recovery, and the extent of recovery that takes place later on will all be determined by how the virus plays out. We don’t take a call on that. Whatever the experts tell us, whatever information we get from, let’s say, Oxford University, which is looking at the stringency of lockdowns etc, or from the ICMR [Indian Council of Medical Research], etc, we take that and if we see that tilting towards the worse, then that gets factored into the outlook, because that will immediately lead to not lowering of guard as far as the restrictions are concerned. So, that is the prime factor.

The second is, if you are doing containment, then you need support. So, is the requisite support coming or not? On that basis, there is no scientific method to project at this juncture. The models will not work the way they worked earlier, because this is a disruption. So, there is a lot of judgement that goes into assessment on the basis of whatever information we gather.

Let’s talk about the red zones now. These red zones also seem to be India’s strongest centres of economic activity. So, how is this dilemma going to play out now? And what could the economic policy response to this be, assuming, let’s say for the next one year, many of these centres are likely to be subdued?

I think you rightly pointed [it] out. The three of the most impacted states--Maharashtra, Gujarat and even Tamil Nadu for that matter--have a larger share of non-agriculture in their GDP. These are non-agri dominated states, and so the output impact of containment will be quite high there, because agriculture, as I said earlier, is not impacted that much. It is the non-agriculture [which has been affected]. So, the more you have the share of the non-agriculture, the more vulnerable you become from an output perspective.

It is not only the red zones. Even if you have bifurcated your economy into red, orange and green zones from a production perspective, what it means is that if the supply chains are cutting across all the zones, then you cannot fully start your production activity unless the other parts of the state or of the country--which supply, which provide you essential materials for inputs [open up]. The production will not be smooth even in green zones, because of the linkages with the supply chains. So clearly, it is not about red zones alone, it’s also about how the production is structured in a particular state. So going ahead, I think this is going to mean that loss of GDP is going to be higher in these states.

As we go ahead, if the red zone dilemma remains unresolved, should economic policy and businesses look at relocation?

I don’t think businesses will relocate so quickly. People are treating it as something which is [a] fait accompli, at least in the short run, so you have to bear with it.

And even if you were to relocate, I think the economic activity will not return to its full [potential] because there are many behavioural issues that will continue to play out going ahead. People will not consume the way they did, a lot of service sector activities will not happen. And even demand for these products, even if you relocate, is not going to rise that way. So, even if you manage to operate with lower capacity utilisation, that will be broadly in sync with the demand in the economy.

So, I don’t think there is [any] surging demand happening, at least this year, that you need to ramp up your production to that extent. Look at the auto sector for instance; they are 80% down. So, it wouldn’t make sense for them to ramp up the capacity utilisation all of a sudden. All I am saying is that the supply-side constraints will not allow you to reach your potential in this crisis. That’s how I would read it, and I won’t look at relocation.

Some parts of industry--consumer goods, essentials--have restarted, in some parts of the country. Any early hints on what kind of demand trends we are seeing?

To begin with, you will see some pent-up demand because people were not buying non-essentials for some time, and now there will be apparently a surge in demand for some of those items. But that is not going to last, because eventually sustainability depends on income. And I think in this scenario, even if people's incomes were not falling too much, they would still like to save more. They would not like to consume. That is the normal behaviour during a crisis. You preserve your cash. So, I don’t see a surge in demand anytime soon, though there will be some pick-up because of the pent-up demand, but that will not last too long.

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