RBI news-bulletin predicts Q2 GDP to shrink by 8.6%, economy to enter recession mode

~ by Trinanjan Chakraborty

The Reserve Bank of India (RBI), in an article titled “State of the Economy” in its bulletin “Nowcast” has stated that the GDP is expected to shrink by 8.6% in the second quarter (Jul-Sep) of the current fiscal. “Nowcasting” is the prediction of the present or the very near future of the state of the economy. The prediction is based on quarterly results declared by 887 non-financial listed companies whose sales remained in contraction in Q2. The Indian economy had contracted by an unprecedented 23.9% in the first quarter, a large part of which saw most economic activities come to a total standstill due to the lockdown brought on by the Covid-19 pandemic.

If the prediction holds true, then the Indian economy will slip into a recessionary mode for the first time ever. An economy is said to be in recessionary mode when its posts negative growth for two quarters in succession. The relaxation of the lockdown started from June and at present, most economic activities are back to nearly pre-lockdown levels. The GST collection in October topped Rs 1 lakh crores for the first time since February, indicating a revival. The RBI also clarified that this bulletin does not represent the final official position which would be known on Nov 27th when the NSO releases the official numbers for the quarter.

The other concern flagged off by the RBI in its bulletin concerns rising inflation and second wave of covid-19 in Europe. The retail inflation in September stood at 7.34%, exceeding the upper limit of the RBI mandated range of 2-6%. It was also the highest since January of this year. October inflation numbers are expected later this week. Other major concern is the continued rampage of the pandemic in USA and a severe second wave in Europe which has seen most major European nations enforce a second lockdown. This could have a detrimental effect on external demand and thus hamper the export market for India. Exports declined 5.4% y-o-y in October and for H1 (Apr-Oct), the drop compared to same period last year was 19.05%. Although with imports also declining, the balance of trade position improved.

All considered, the RBI expects the economy to come out of contraction in the 3rd quarter (Oct-Dec) of the fiscal.

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