Need to find coronavirus vaccine to save economy; GDP may shrink this much if vaccine is unavailable

Every month of lockdown is costing 1 percentage point from a yearly growth perspective for the Indian economy.

As India fears recession due to a slow pace of economic activity, the unavailability of the coronavirus vaccine may further deteriorate the economy’s health. A longer wait for the coronavirus vaccine may lead to a contraction of up to 7.5 per cent in the Indian GDP in the current fiscal, PTI cited the economists at Bank of America Securities. Within a week, they have also revised down the base case estimates for the real GDP, now expecting it to contract by 4 per cent on the back of slow economic activity.

The analysts underlined that the base case has come near the earlier worst-case scenario of 5 per cent, as every month of lockdown is costing 1 percentage point from a yearly growth perspective for the Indian economy. Estimating a sharp economic contraction of 18 per cent in the first quarter, the analysts held the weak industrial production responsible for the worrisome economic picture. IIP shrank 34.7 per cent in May after shrinking 57.6 per cent in April 2020.

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Even as the country steps out of the strict nationwide lockdown and enters the unlock phase, there are many states and districts that are still under lockdown. The stretch in the lockdown are expected to prolong till mid-September, which was mid-August earlier. Given the prolonged lockdown in India, the economists suggested that FY21 GDP may contract by another 1 – 4 per cent.

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Meanwhile, given the slow economic activity, the Bank of America Securities has predicted that the Reserve Bank of India is likely to cut rates by 75 basis points in the current fiscal as a base case. It has also estimated that the centre’s fiscal deficit will reach 6.85 per cent of GDP, against the budgeted 3.5 per cent. Also, the overall fiscal deficit may shoot up to 10.7 per cent.