OECD warns India’s GDP could contract to 7.3% if second-wave of COVID-19 hits

Contraction in India’s GDP growth will depend on whether the country faces a second wave of the coronavirus pandemic, the Organisation for Economic Co-operation and Development (OECD) said.

The organisation estimates GDP growth to contract between 3.7 percent and 7.3 percent depending on whether India undertakes another lockdown, Isabelle Joumard the OECD’s India Economist told the Hindu BusinessLine.

She said the economic outlook is “extremely uncertain given how the pandemic will evolve and we have drawn projections for two epidemiological scenarios for each country.”

As per these scenarios, for India, in case of a single wave a 10-week lockdown followed by targeted lockdowns would be successful, leading to a U-shaped recovery. “Activity is projected to revert back to the pre-crisis level only in the last quarter of 2020 and income (GDP) will fall by about 3.5 percent in FY21,” she noted.

In case of a double-hit, the second albeit less severe wave would require another extended lockdown pushing investment and consumption further down.

“Exports and remittances would also fall more than in the single-hit scenario. The growth profile would be W-shaped, with a smaller second leg but long-lasting scares. In this more adverse scenario, activity would drop by over 7 percent in FY21 and recover gradually throughout FY22,” she stated.

Joumard said that the Centre’s fiscal stimulus focused on wide ranging areas of the economy, but added that “supportive fiscal and monetary policy stances should be maintained.”

“Short-term work schemes and other job security and wage subsidy programmes…direct cash and support programmes to the most vulnerable households…ramping up healthcare resources, professionals, hospital beds will help reduce health risks,” she added.

Rebooting investment will be key to promote income and job creation in the medium run, she noted, adding that the government must supplement guarantee schemes with “bold reforms and recapitalisation of public sector banks.”

“The authorities will also need to become more selective in supporting companies and banks. Faster bankruptcy resolution procedures would help avoid locking resources in zombie firms,” she noted.

Besides this, modernising labour regulations, creating more formal jobs, improving education and skills and further loosening of restrictions on foreign investment and trade barriers would be key to attract investors, Joumard stated.